Understanding the Nuances of the Gross Negligence Penalty

By Cody Adam; Published in CPABC in Focus
Published: 01/01/2021

The Canada Revenue Agency (CRA) is assessing the “gross negligence penalty” with increasing frequency in income tax disputes, and a recent Tax Court of Canada case highlights some important considerations for taxpayers and their advisors. Here’s a quick review of some issues of concern.

The penalty

Canada’s Income Tax Act allows the CRA to assess a gross negligence penalty to a person who knowingly, or under circumstances amounting to gross negligence, makes a false statement or omission in a tax return. The penalty is generally equal to $100 or 50% of the tax avoided—whichever is greater. Arrears interest charges also apply to both the additional tax assessed and the penalty amount, which adds to the cost.

Determining whether a taxpayer was grossly negligent is an objective test that compares the behaviour of the taxpayer to that of a reasonable person. However, the courts have held that the term “knowingly” should be interpreted to include both actual knowledge and wilful blindness, and determining whether a taxpayer was wilfully blind in making a false statement or omission is a subjective test that requires proof of awareness. As noted in Wynter v. Canada, wilful blindness may be construed as deliberate ignorance: “A taxpayer is wilfully blind in circumstances where the taxpayer becomes aware of the need for inquiry but declines to make the inquiry because the taxpayer does not want to know, or studiously avoids, the truth.”1

Burden of proof

The onus of proof for a gross negligence penalty is on the Minister of National Revenue. As per the Federal Court of Appeal, “In assessing the penalties for gross negligence, the Minister must prove a high degree of negligence, one that is tantamount to intentional acting or an indifference as to whether the law is complied with or not.”2 The courts have consistently held that this is a heavy burden.3 If insufficient facts are presented, the penalty will be cancelled.

According to CRA policy, when proposing to assess a gross negligence penalty, auditors should prepare a penalty recommendation report that contains a complete summary of all supporting facts. This report can usually be obtained directly from the CRA auditor during an audit’s proposal stage. Alternatively, a copy can be obtained through the Access to Information Act.

It is good practice to request a copy of the penalty recommendation report whenever a gross negligence penalty has been proposed. The report can provide many details needed to respond to a penalty proposal during an audit, and (if necessary) to support an objection through the CRA appeals process and/or through the courts.

Hansen v. The Queen, 2020 TCC 102

The case of Hansen v. The Queen,4 which centres on the practice of house-flipping and whether a taxpayer was grossly negligent in failing to report the sale of real estate, illustrates how challenging it can be for the Minister to prove negligence.

Mr. Hansen and his spouse Ms. Weiland purchased (or built), lived in, and sold five homes in Ontario between 2006 and 2012. The couple met with a chartered professional accountant annually to prepare their personal income tax returns and notified the CPA of their real estate transactions, including the rationale for sales and their intention with respect to each home. At trial, the CPA testified that the couple had indeed consulted him about their real estate transactions each year; he further told the Court that after reviewing the real estate transaction details and considering the couple’s situation, he had advised the couple that these transactions did not need to be reported on their personal tax returns, due to the CRA administrative policy for principal residence exemption dispositions in force for the tax years in question.

At issue: In auditing Mr. Hansen,5 the CRA reassessed the principal residence exemption dispositions (five in total) as having occurred on income account, which meant that the principal residence exemption did not apply and the dispositions should have been reported on their personal income tax returns.

The Court first had to consider whether the Minister was entitled to reassess the first three dispositions beyond the normal reassessment period, because more than three years had passed since the original notices of assessment had been issued for the tax years in question. The statute of limitations contains its own negligence test, one that differs from the gross negligence test, so the Court had to consider both when making its determination, ultimately ruling that Mr. Hansen was not negligent in failing to report the dispositions. The Court stated that the reporting omission was not a negligent misrepresentation because Mr. Hansen had consulted and followed the advice of a tax professional. Accordingly, the Court said the CRA was not allowed to reassess the tax years in question beyond the normal period and cancelled the reassessments for the first three dispositions.

With regard to the two remaining dispositions, however, the Court determined that the remaining properties had been sold on income account and not capital account, with income tax payable because the principal residence exemption does not apply to dispositions on income account. The final issue then, was whether the gross negligence penalty was applicable to the tax owing on these two unreported transactions. The Court found that Mr. Hansen had not knowingly (either in fact or from wilful blindness) made a false statement or omission on his returns, because he had honestly believed he was correctly reporting his income. The Court pointed out the fact that Mr. Hansen had sought advice from, and provided complete information to, his CPA, and noted that this behaviour contrasts with situations of wilful blindness.6

The burden then fell on the Minister to establish that the conduct “represented a marked and substantial departure from the conduct of a reasonable person in the same circumstances.”7 The Court ruled that the Crown did not meet this burden of proof, because it did not prove that Mr. Hansen had intentionally misreported his income, nor that he’d acted with disregard for the law. Once again, the Court noted that Mr. Hansen’s professional tax advisor, equipped with all the relevant information, had advised him that he did not need to report the transactions on his personal tax return under current CRA administrative policy.

The Court concluded that Mr. Hansen’s behaviour was consistent with that of a reasonable person and noted that “even if Mr. Hansen’s conduct was consistent with two viable and reasonable hypotheses, one justifying the penalty and one not, the benefit of the doubt must be given to the taxpayer and the penalty must be deleted.”8

Therefore, the Court ruled that the gross negligence penalties were not applicable to Mr. Hansen.


Mr. Hansen had considerable success in his case: He avoided tax reassessments on three out of the five dispositions and gross negligence penalties on all five. He achieved this success because he filed his tax returns in a timely manner and sought professional advice on the correct reporting of his income in his tax returns. Mr. Hansen provided his professional advisor with complete information, and his advisor provided him with advice—facts that could be demonstrated to the Court.

Being able to establish that a person sought advice from a qualified tax advisor when filing their tax return is one way to demonstrate that they acted reasonably, and it could be critical to success in disputing a gross negligence penalty.


Cody AdamCody Adam is a senior tax manager at D&H Group LLP Chartered Professional Accountants in Vancouver, where he works with clients on tax planning, corporate reorganizations, estate planning, and disputes with the Canada Revenue Agency on income tax matters.



  1. Wynter v. Canada, 2017 FCA 195 at paragraph 13 (CanLII), http://canlii.ca/t/h6cgm, retrieved on November 23, 2020.
  2. Zsoldos v. Canada (Attorney General), 2004 FCA 338 at paragraph 21 (CanLII), http://canlii.ca/t/1j269, retrieved on November 23, 2020.
  3. See, for example, Corriveau v. The Queen, 1999 CanLII 523 (TCC) at paragraph 24, http://canlii.ca/t/1c5hs, retrieved on November 23, 2020.
  4. Hansen v. The Queen, 2020 TCC 102 (CanLII), http://canlii.ca/t/j9mz0, retrieved on November 23, 2020.
  5. Although the couple jointly owned the properties in question and the testimony considered the behaviour of both individuals, this case focused on the reassessments of Mr. Hansen’s returns. He was the sole appellant.
  6. Hansen v. The Queen at paragraph 125.
  7. Ibid, at paragraph 126.
  8. Ibid, at paragraph 129.

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