Subsection 163(1) of the Income Tax Act (the
"Act") imposes a penalty of 10% on an amount that a
taxpayer fails to report in his/her return where there has been a
previous failure to report income in any of the three preceding
taxation years.
The penalty under subsection 163(1) has been described as
"harsh" due to the 10% federal penalty, a potential 10%
provincial penalty, and the fact that the penalty may apply even
where minimal or no additional tax is owing by the taxpayer
(i.e., the tax relating to the unreported amount was
withheld at source and remitted to the CRA).
In several cases, the courts have held that a taxpayer that is
the subject of a penalty under subsection 163(1) has a due
diligence defence. A taxpayer can satisfy the due diligence test in
one of two ways: (i) By establishing that he/she made a reasonable
mistake of fact (i.e., the taxpayer was mistaken as to a factual
situation and the mistake was reasonable), or (ii) by establishing
that
