Unproven Allegations of Dishonesty, Wilful Blindness, or Gross Negligence: The Case for Cost Consequences in the Tax Court of Canada

Michael H. Lubetsky ()
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Michael H. Lubetsky: McMillan LLP, Toronto

Canadian Tax Journal, 2025, vol. 73, issue 3, 467-503

Abstract: The Income Tax Act and the Excise Tax Act impose penalties on taxpayers who fail to comply with their obligations "knowingly" or "under circumstances amounting to gross negligence" ("KGN penalties"). The case law has established a high threshold for "gross negligence," holding that it requires the taxpayer to have shown "a high degree of negligence tantamount to intentional acting." The minister of national revenue bears the onus to prove the facts supporting the imposition of a KGN penalty. Since 2018, in appeals of KGN penalties that proceed to judgment, the Tax Court of Canada has completely vacated the penalties approximately 30 percent of the time, on the basis that either there was no non-compliance by the taxpayer, or the taxpayer's non-compliance was unintentional and did not result from a high degree of negligence tantamount to intentional acting. In the civil courts, as endorsed by the Supreme Court of Canada, adverse cost consequences can result when a party alleges fraud or dishonest conduct and fails to prove the allegations ("the fraud costs rule"). This article argues that the Tax Court should adopt the fraud costs rule and allow taxpayers to claim enhanced costs when the Crown fails to meet its burden of proof when litigating a KGN penalty. Allowing taxpayers to presumptively claim such costs would, it is hoped, motivate the minister to take greater care when deciding whether to assess and litigate KGN penalties, which would in turn help to avoid the unfortunate situation—of which many troubling examples exist—of KGN penalties being unreasonably and improperly proposed or imposed on taxpayers.

Keywords: Civil penalties; gross negligence; costs; Tax Court of Canada; tax litigation; statistics (search for similar items in EconPapers)
Date: 2025
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DOI: 10.32721/ctj.2025.73.3.lubetsky

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