Make sure clients declare all income

While we may not prepare our clients’ tax returns, we can certainly assist them with gathering the necessary paperwork, taking extra care to ensure they have received all the necessary information to properly include all their investment income on their tax return.

A tax case decided last month (Norlock v The Queen, 2012 TCC 121) involved penalties imposed by the Canada Revenue Agency for the failure of Barbara Norlock to include and report income from investments on her 2008 tax return.

Under the Income Tax Act, “every person who fails to report an amount required to be included in computing the person’s income in a return […] and had failed to report an amount required to be so included in any return […] for any of the three preceding taxation years is liable to a penalty equal to 10% of the amount [not included].”

In other words, the penalty is applied when a taxpayer fails to report income in his or her tax return in any two tax years within a four-year period. The amount of the penalty is 10% of the amount of income not reported. In Norlock’s case, the amount of unreported interest income was $18,376 and the federal penalty was $1,837.60. An equal provincial penalty was also imposed.

Norlock conceded she failed to report interest income of $876 in her 2006 income tax return. She also admitted that in 2008, the year under review, she failed to report interest income of $14,274 that she received from TD Waterhouse as well as “other income” of $4,102, which she received from the TD Premium Money Market Fund.

To avoid the penalty, the Judge needed to determine whether Norlock exercised “due diligence” when she failed to report this investment income.

During the years in question, Norlock worked in the software industry and had income of over $100,000. She testified that in January 2007, she sold her home and moved to a rental apartment. Even though she told Canada Post to redirect her mail, she never received a T5 for the interest income of $876 for 2006.

When she was reassessed, she didn’t question the amount of interest income included in her income by the CRA, but simply paid the amount of the reassessment. She figured the source of the interest income in 2006 was from her Amex savings account, as it was her only non-RRSP account that year.

When she sold her home, some of the proceeds were used to buy a TD GIC and the rest invested in the TD Premium Money Market Fund. Sixteen months later, the principal and interest from her TD investments were used directly to purchase a new home. She argued that all the unreported income in 2008 was from these two investments, the situation was unusual and she never received a T5 for it.

Based on prior jurisprudence, the courts have ruled that in order to avoid the omission penalty from applying, a “due-diligence defence” is available for either the first or second failure to report income. While Norlock conceded no such defence could be made for the 2008 taxation year, since presumably her omission was material, her argument focused on the 2006 omission of the $876 of interest income.

She testified this omission “ was a reasonable mistake of fact. [It was] overlooked… because she was not in the habit of earning and reporting interest income… Viewed objectively, the mistake was reasonable as the amount of unreported income in 2006 was less than 1% of the income which [she] reported” that year.

The due-diligence defence can be used in cases where the taxpayer has either made a “reasonable mistake of fact” or, at the very least, took reasonable precautions to avoid the event leading to the penalty.

The Judge agreed that since the amount of unreported income in 2006 was only 1% of her total income, her failure to report it was indeed innocent.

That being said, the Judge was not convinced “that a reasonable person in the same circumstances would have made the same mistake. [Norlock] is intelligent and she appeared to be a sophisticated businesswoman. She had only one savings account in 2006 and she received only one amount of interest income. She failed to report any interest income in her 2006 return.”

In the Judge’s opinion, when Norlock took her tax forms to her accountant to prepare her 2006 return, she should have realized she hadn’t received her T5 slip reporting her interest income. Yet, she took “no actions” to get a T5 from Amex. As a result, the Judge felt Norlock failed to take “reasonable measures to report all of her income in 2006 or 2008” and upheld the penalty.

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.