Repeated Failure-To-File Penalty: Scope Narrowed

A repeat late filer may be assessed a penalty of up to 50 percent of the income tax payable that was unpaid when the return was due. However, in Hughes v. The Queen (2017 TCC 95; informal procedure), the court held that the penalty does not apply when the taxpayer files the return within the time period set out in the demand to file. This is a marked departure from the CRA’s administrative practice to date. Hughes could be the basis for the filing of a notice of objection with respect to recent applications of this penalty to clients, particularly since the onus is on the minister to prove that the penalty has been properly imposed.

The English text of subsection 162(2) contains a series of preconditions for the application of the penalty:

  • The person must fail to file the return as and when required by subsection 150(1).
  • The minister must have sent the person a demand for the return under subsection 150(2). (Until 2012, the demand for the return had to be served personally or by registered letter.)
  • The person must, before the time of failure, have been liable for a penalty under subsection 162(1) or 162(2) for any of the three preceding taxation years.

Thus, according to the English text, the moment that a demand to file is sent to a repeat late filer for an overdue return, the penalty will apply—even if the taxpayer complied with the demand. This is precisely how the CRA had been applying the provision. In Hughes, however, the court held that the French text of subsection 162(2) included a condition that the taxpayer must have failed to file his or her return within the reasonable period set out in the demand. The court preferred the French text, noting that Parliament must have had a purpose in requiring that a demand be sent to the taxpayer under subsection 150(2); if not, and if failing to respond to a demand does not matter for the purposes of the penalty, why insert that precondition at all?

Hughes leaves two questions unanswered:

  • The subsection 162(2) penalty ranges from 10 percent to 50 percent, varying with the number of complete months “from the date on which the return was required to be filed to the date on which the return was filed.” Should the former date be the deadline set out in the demand, as the court said in obiter? This reading would be consistent with the court’s interpretation that the triggering event in subsection 162(2) is the failure to comply with the demand. However, another interpretation, which is less favourable to the taxpayer, is that this date is the normal filing-due date.
  • If the penalty is triggered by a failure to comply with a demand, suppose that a taxpayer did not receive the ­demand even though it had been mailed by the minister. Could this failure to receive be a defence, or would the minister prevail simply by showing proof of mailing ­(Bailey, 2017 TCC 24)?

More broadly, what is a “reasonable time” (subsection 150(2)) for a filing-due date in a demand to file? The CRA’s normal practice is to provide 30 days, which might be a reasonable time given that the normal filing-due date has already passed. On the other hand, the very absence of a specific deadline or time period in subsection 150(2) indicates that a “reasonable time” might vary depending on the circumstances of the taxpayer.

First published by the Canadian Tax Foundation in Canadian Tax Focus, Volume 7, Number 3, August 2017