Canada’s tax system

is commonly referred to as a “self-assessment” system, meaning that individuals

complete a tax return

each year to report their annual income, claim any applicable deductions or credits, and calculate whether they owe tax or will be entitled to a refund.

To encourage taxpayers to diligently report all of our income, the

Income Tax Act

imposes penalties for failure to do so. Under the Act, if you fail to report at least $500 of income in a tax year, and in any of the three preceding taxation years, you can be hit with a “repeated failure to report income” federal penalty. This is calculated as the lesser of 10 per cent of the unreported income, and 50 per cent of the difference between the understatement of tax (or the overstatement of tax credits) related to the omission, and the amount of any tax paid in respect of the unreported amount, for example, by an employer through source deductions withheld. A corresponding provincial 10 per cent penalty is also often assessed.

For example, if you forget to report more than $500 of income you received in 2025, and also forgot to report more than $500 in income in any of your 2022, 2023 or 2024 returns, you can be hit with this failure-to-report penalty. That’s exactly what happened to a taxpayer who wound up in federal court earlier this month seeking penalty relief.

The taxpayer’s troubles began in October 2023, when she received two Notices of Reassessment from the

CRA

for the 2020 and 2022 taxation years. It seems that in 2020, she failed to report income from a T4 slip from the Nova Scotia Health Authority, and was charged $14.04 in arrears interest due to this failure. Unfortunately, the taxpayer also failed to report income on her 2022 return from a T4A, from RBC Investor Services Trust, and was charged $140.64 in arrears interests.

But, because this was the second time in three years that she had omitted to report income, she was hit with federal penalties of $770.20, and provincial penalties of $352.71 for repeated failure to report.

After being reassessed, the taxpayer immediately contacted the CRA to request a waiver of the penalties and interest imposed relating to her 2022 tax return under the “

taxpayer relief provisions

.” These provisions allow any taxpayer who feels that they were unjustly charged penalties or arrears interest on

income taxes owing

to apply to the CRA for relief.

The CRA has the discretion to cancel or waive either all or a portion of any interest or penalties (but not the actual tax) payable for the ten previous calendar years if the penalties and interest resulted from circumstances beyond the taxpayer’s control. These can include extraordinary circumstances, such as natural disasters, a serious illness or accident or serious emotional or mental distress such as a death in the family.

The Agency can also cancel interest charged resulting primarily from CRA actions, such as processing delays that result in taxpayers not being informed (within a reasonable time) that an amount was owing, errors in CRA material which led a taxpayer to file a return based on wrong information, incorrect information provided to a taxpayer by the CRA, and processing errors. Finally, the CRA will also consider financial hardship and an inability to pay.

If a request for relief is turned down by the CRA, you can request a review by a second CRA official. If your request is again rejected, you can apply to the Federal Court for a judicial review. That court will then determine whether the CRA “exercised its discretion in a reasonable and fair manner,” with the power to send it back to the CRA, once again, for reconsideration by a new officer

In the recent case, the taxpayer’s request for relief from the failure-to-report penalty and arrears interest was denied by the CRA agent, so the taxpayer appealed to a different agent, which led to a second denial. At this point, the taxpayer turned to federal court.

The taxpayer stated in her request that she checked her TurboTax return and had entered the T4A information from RBC Investor Services Trust but that a blank return was submitted to the CRA, that the omission was an honest mistake and that she had no intention of lying or committing fraud in filing her tax return. The taxpayer apologized for the omission, offered to pay the balance rapidly, and had voluntarily paid the tax debt owing in full the same day.

The taxpayer argued that her tax return and payment history has been in a good standing for the past ten years, that she had demonstrated “reasonable care,” that she has not intentionally misreported her income, and that she has not acted with disregard for the law. She asked the court to take into account that her error was an “honest and reasonable mistake that an ordinarily prudent person could have committed in similar circumstances.”

The taxpayer also argued that since her 2020 and 2022 tax returns were both reassessed on the same day (i.e. October 5, 2023), she hadn’t been previously notified of her first failure to report income (for 2020) prior to being notified of the second failure (for 2022), and, as a result, she was “not able to prevent the second occurrence.” The taxpayer contended that by delaying the processing of the first notice of reassessment for 2020, the CRA gave her no warning that an error had occurred and no warning of a possible penalty for reoffending.

The judge found no merit to this argument, as the Tax Act does not require notification of a prior omission for the penalty to apply on a second omission in three years. As a result, the judge found that it was reasonable for the CRA officer to conclude that the events leading to the penalties and arrears interest were not situations beyond the taxpayer’s control, and dismissed the taxpayer’s case, effectively upholding the penalties and interest.

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Jamie Golombek,
FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto.
Jamie.Golombek@cibc.com

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