Subsection 163(2) Of Canada's Income Tax Act

Legal Consequences of Misrepresentations in Tax Matters

Subsection 163(2) of the Income Tax Act (the “Act”) outlines the penalties that can be levied by the Minister for misrepresentations in tax matters. A statement is deemed false if the person making it knows it to be false or reasonably should know that it was false. Below, we detail the penalties, associated offences, and critical aspects of this subsection of the Act.

What is Subsection 163(2) of the Act?

Subsection 163(2) of the Act addresses the penalties associated with making false statements or omissions in a taxpayer's return, statement, or other document filed under the Act. The section specifically outlines that if a taxpayer knowingly, or under circumstances amounting to gross negligence, makes false statements or omissions, they may be subject to penalties.

There are three degrees of “knowledge” for the purposes of establishing s. 163(2):

1. Actual knowledge;
2. Deliberately refraining from making inquiries (wilful blindness); and
3. Constructive knowledge (gross negligence).

Key Elements of Subsection 163(2)

1. Intent and Gross Negligence: The provision distinguishes between deliberate falsehoods and careless mistakes. A taxpayer can be penalized if they knowingly make false statements or omissions, or if they exhibit a reckless disregard for the accuracy of the information provided. The mere failure to exercise the care of a reasonable person is not enough to constitute gross negligence.
2. Penalty Amounts: The penalty for such violations is substantial. It can range from a minimum of 50% to a maximum of 200% of the understated tax or the overstated credits related to the false statements or omissions.
3. Application to Various Documents: Subsection 163(2) applies not only to tax returns but also to any documents required under the Act, including information slips, election forms, and any other filings mandated by Canada Revenue Agency (“CRA”).
4. Burden of Proof: The burden of proof lies with the Minister to demonstrate that the taxpayer knowingly made false statements or omissions, or did so under circumstances amounting to gross negligence.

Misrepresentations in Tax Planning Arrangements

As it pertains to misrepresentations in tax planning arrangements, penalties may apply under the following circumstances:

• Making a false statement used by another person for purposes of the Act;
• Furnishing a false statement for use by another person under the Act;
• Participating in making or providing a false statement for use by another person under the Act; or
• Causing another person to make or provide a false statement for use by another person under the Act.

The penalty for a false statement during a planning or valuation activity is the larger of $1,000 or the person's total gross entitlements at the time of assessment. In other situations, the penalty is $1,000.

Participating in a Misrepresentation

A taxpayer may have penalties levied against them in the following circumstances:

• They made a false statement to, by, or on behalf of another person that could be used by or on behalf of the other person for a purpose of this Act;
• They participated in a false statement to, by, or on behalf of another person that could be used by or on behalf the other person for a purpose of this Act; or
• They agreed to or accepted the making of a false statement to, by, or on behalf of another person that could be used by or on behalf of the other person for a purpose of this Act.

The penalty for a false statement in this situation is either $1,000 or the lesser amount of:

• The penalty the other person would incur if they had made the false statement knowing it to be false; or
• The total of $100,000 and the person's gross compensation at the time of the penalty assessment.

In choosing between the $1,000 penalty or the lesser of the two options mentioned above, the larger amount will be selected.

Defenses and Exemptions

Reliance in Good Faith

A person who relies in good faith on information provided by or on behalf of another person is not considered culpable under subsection 163(2). This provision applies unless the statement was made regarding an excluded activity.

Clerical Services

Providing clerical services (excluding bookkeeping) or secretarial services related to a false statement does not constitute making, providing, participating in, agreeing to, or accepting such a statement under subsection 163(2).

Valuations

False statements in property and service valuations occur when the stated value differs significantly from the fair market value multiplied by the prescribed percentage. However, a stated value is not false if it's reasonable considering the circumstances and made in good faith without unreasonable assumptions.

Compliance and Best Practices

To mitigate risks under subsection 163(2), taxpayers are advised to:

• Maintain Accuracy: Ensure all information provided in tax filings is accurate and complete.
• Exercise Due Diligence: Take reasonable steps to verify the accuracy of information before filing.
• Seek Professional Advice: Consult with tax lawyers and professionals to navigate complexities and ensure compliance with the Act.

Conclusion

Subsection 163(2) of the Act serves as a critical deterrent against fraudulent or negligent tax practices. Its enforcement underscores the importance of accuracy and transparency in tax reporting. As taxpayers navigate their obligations under the Act, understanding this provision and its implications can help avoid penalties and maintain compliance with Canadian tax laws.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.