Khanna v. The Queen: A FCA Case on Tax Gross Negligence Penalties

The Federal Court of Appeal (FCA) case, Khanna v. The Queen, 2022 FCA 84, greatly impacts the gross-negligence penalties under subsection 163(2) of the Income Tax Act (ITA). Two key points emerge from this case. Firstly, for the imposition of these penalties, the Canada Revenue Agency (CRA) must prove that the taxpayer showed gross negligence. Secondly, the CRA must shoulder this burden of proof for each taxpayer audited within a project. 

Understanding Gross Negligence Penalty

Canada’s tax system penalizes non-compliance. A gross-negligence penalty targets taxpayers showing a high level of negligence, equivalent to an intentional disregard of the law. This penalty is severe; it equals 50 per cent of any income tax underreported due to gross negligence and 25 per cent of any GST/HST underreported for the same reason. 

The Khanna v. The Queen Case: An Overview

The CRA initiated a net-worth audit of Mr. and Ms. Khanna, mortgage brokers employed by their jointly-owned corporation. For the 2008 tax year, the CRA assessed them for unreported income and imposed penalties for gross negligence under subsection 163(2) of the ITA.

At the trial, both Mr. and Ms. Khanna admitted to the unreported income amounts assessed by the CRA. The question that remained was whether they were liable for gross negligence penalties.

The Tax Court of Canada confirmed the gross negligence penalties. Mr. and Ms. Khanna appealed to the Federal Court of Appeal (FCA). Mr. Khanna, however, did not argue further during the appeal and his appeal got dismissed. The FCA had to decide whether Ms. Khanna was liable for gross negligence penalties.

Decision of the Court

The FCA concluded that the Minister of National Revenue (MNR) didn’t meet the burden of proof to justify the gross-negligence penalties on Ms. Khanna. The MNR couldn’t show any evidence of her knowledge of the unreported income. As a result, there was no proof that she acted with knowledge or gross negligence. The FCA stressed that finding unreported income doesn’t automatically warrant a gross-negligence penalty.

Professional Legal Help with the CRA

If the CRA has assessed you for gross negligence penalties, don’t hesitate to contact us immediately for your free consultation. Our lawyers can offer you the best defense against gross negligence penalties and help you resolve your tax dispute.

—

By Kaveh Rezaei – Attorney at KR Law Firm

**Disclaimer 

This article contains information of a general nature only and does not constitute legal advice. All legal matters have their own specific and unique facts and will differ from each other. If you have a specific legal question, it may be appropriate to seek the services of a lawyer.