Dhanoa v. The Queen
(June 23, 2015 – 2015 TCC 164, V. Miller J.).
Mr. Dhanoa failed to report investment income in both 2011 and 2012. As a consequence the Minister applied a 10% penalty under subsection 163(1) of the Income Tax Act
(the “Act”) to his 2012 taxation year. Mr Dhanoa appealed the imposition of the penalty and raised a defence of due diligence.
The Court concluded that he had not acted with due diligence in either 2011 or 2012 and dismissed his appeal.
Mr. Dhanoa failed to report investment income in both 2011 and 2012:
 Craig Peturson, a Team Leader in the Appeals Section of the Calgary Tax Services Office of the Canada Revenue Agency (“CRA”) testified on behalf of the Respondent. His evidence established that the Appellant failed to report amounts in his 2011 and 2012 income tax returns. Those amounts were as follows:
a) For the 2012 taxation year, the Appellant received interest income of $128.64 from Khalsa Credit Union (Alberta) Limited (“Khalsa Alberta”) and interest income of $51,598.62 from Stone West Homes Inc. (“Stone West”). He failed to report both of these amounts;
b) For the 2011 taxation year, the Appellant also failed to report income which he received from these same entities. He received and failed to report interest income of $127.16 from Khalsa Alberta and capital gains of $18,817 from Stone West.
The Minister imposed a penalty of 10% for Mr. Dhanoa’s 2012 taxation year pursuant to subsection 163(1) of the Act:
163. (1) Every person who
(a) fails to report an amount required to be included in computing the person’s income in a return filed under section 150 for a taxation year, and
(b) had failed to report an amount required to be so included in any return filed under section 150 for any of the three preceding taxation years
is liable to a penalty equal to 10% of the amount described in paragraph 163(1)(a), except where the person is liable to a penalty under subsection 163(2) in respect of that amount.
The Court acknowledged a split in the Tax Court over whether it was sufficient to escape the imposition of a penalty if a taxpayer could demonstrate due diligence in either of the two years mentioned in the provision:
 I realize that at least four other judges of this Court have held that a taxpayer can be relieved of a penalty under subsection 163(1) if he can establish a due diligence defense for either of the two years within the four year period. I disagree with this reasoning. It is my view that the taxpayer must establish a due diligence defense for the year that the penalty was imposed. In this appeal that year was 2012. It was the failure to report interest income of $51,727 in the 2012 taxation year which triggered the penalty.
 However, because this issue has not been decided by the Federal Court of Appeal, I will give the Appellant the benefit of the doubt by considering his due diligence argument for both 2011 and 2012.
The Court rejected Mr. Dhanoa’s argument that he had demonstrated due diligence in 2011:
 In the 2011 taxation year, the Appellant reported employment income of $18,000. It was his evidence that he may have mistakenly reported the capital gains of $18,817 which he received from Stone West as his employment income. With respect to the interest income of $127.16 from Khalsa Alberta, he stated that he knew he had to pay tax on this income but he thought that he didn’t have to report it because the CRA would receive a copy of the T5 slip from the credit union.
 I do not believe that the Appellant mistakenly reported the capital gains he received from Stone West as his employment income. Nor do I believe that the Appellant’s explanation is credible. For 2011, the Appellant reported employment income of $18,000 and taxable dividends of $35,000 for total income of $53,000. The T4 enclosed with his 2011 income tax return (“2011 return”) was from 1339421 Alberta Inc. and it showed that his employment income was $18,000. I note that the taxable dividends were also from the same numbered company.
He was similarly unsuccessful in 2012:
 The evidence demonstrated that the Appellant had a pattern of not reporting interest income. In 2003, 2006, 2007, 2008 and 2010, the Appellant failed to report interest income he earned from Khalsa Alberta. In 2004, he failed to report interest income he earned from TD Mortgage Corporation. The Minister reassessed the Appellant to include the unreported interest income in his income for 2003, 2004, 2006 and 2008.
 The Appellant stated that he knew that the Minister received a copy of the T5s from the issuer and he waited each year for the Minister to discover the failure to report and to reassess him. It is my view that the Appellant was playing a game of “catch me if you can” with the Minister. It appears that the Minister did not catch him in 2007 and 2010.
Since Mr. Dhanoa failed to demonstrate due diligence in either 2011 or 2012 his appeal was dismissed.