163(2) Ignorance Could Have Been Bliss

Volume No. 06-15

“If you receive tax advice and disregard it, you are far more exposed for penalties.”

The recent Coady case (2006TCC 153) related to the sale of land, and whether the gain on sale was a capital gain or was income for tax purposes. We shall not focus here on that aspect, but rather on the penalties for gross negligence, which were assessed on the taxpayer, under subsection 163(2) of the Income Tax Act.

The taxpayer was a well-educated man who was vice- principal of a high school and executive director of a golf association in Prince Edward Island. He even “did the books” for both.

When the taxpayer sold the property, he realized that there were significant tax issues and consulted an accountant. The accountant explained the income tax considerations to determine if the land sale was on account of income or capital. The accountant also explained the GST implications. The accountant gave no final opinion, but stated that he would be happy to discuss the subject further with Mr. Coady. Although the land was owned solely by the taxpayer, the entire gain was reported on his wife’s tax return, since he believed that his wife had a capital loss carryforward that she could use to offset part of the gain.

The fact that the taxpayer consulted a professional accountant, knowing that there weresignificant tax issues, was considered by the CRA in assessing penalties. The Court’s view was that the taxpayer consulted an accountant, took advice, and then “cherry-picked” which advice to use and which to disregard. Including the capital gain on his wife’s tax return, when there was no legal or other reason to do so, was, in the Court’s opinion, evidence that the taxpayer acted in total disregard of the law.

A lesson here is that, if you receive professional tax advice and disregard it, you may beexposed to penalties. Another lesson is obvious — you must report all gains on your tax return, and cannot have them reported instead on your spouse’s return, unless the gain was actually hers.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.