Written by Ather Kandella, Levy Pilotte
Subsection 163.2(4) of the Income Tax Act (ITA), the “preparer penalty,” provides for a penalty on a person who makes, or participates in, assents to, or acquiesces in the making of a statement to, by or on behalf of another person that the person knows, or would reasonably be expected to know but for circumstances amounting to culpable conduct, is a false statement that could be used by or on behalf of the other person for a purpose of the ITA. Note, a false statement includes a statement that is misleading because of an omission from the statement.
Despite the name “preparer penalty,” it can apply to any person in the situation described and is not limited to a tax return preparer. Subsection 163.2(4) would be applicable to the tax return preparer for each investor or taxpayer that can be identified.
Examples would include:
The amount of the preparer penalty is determined under subsection 163.2(5) of the ITA. Subsection 163.2(5) provides that the penalty to which a person is liable under subsection 163.2(4) of the ITA in respect of a false statement is the greater of:
a) $1,000, and
b) the lesser of:
i) the penalty to which the other person (i.e., the person who could use the false statement for a purpose of the ITA) would be liable under subsection 163(2) (commonly called the gross negligence penalty) if the other person made the statement in a return filed for the purposes of the ITA and knew that the statement was false (basically 50% of the tax avoided by making the false statement); and
(ii) the total of $100,000 and the person’s gross compensation, at the time at which the Notice of Assessment of the penalty is sent to the person, for the false statement that could be used by or on behalf of the other person.
As part of the preparation of any tax return or any tax filing, accountants request a lot of information from taxpayers and often ask a number of follow-up questions. It is important for taxpayers to be aware that accountants are subject to serious consequences if they prepare a return that includes information which they suspected was not correct. If a tax return, tax election, or any other filing or matter under the ITA is not complete and accurate because of a false statement which the preparer would reasonably be expected to know, the preparer penalty could potentially apply.