Mr. Morgan hadn't reported some trust income in two of the 3 earlier tax years. Those failures made him liable for a penalty under ITA s. 163(1) on the amount of his pension that he took directly. But, though the $36,000 transferred to his wife's RSP was taxable and Mr. Morgan didn't report it, the TCC said he had been diligent enough in complying with the tax law. He thought the amount was not taxable and no one told him otherwise. So, the TCC said he didn't have to pay a penalty on the $36,000 RSP contribution.
In excusing Mr. Morgan from penalty on the $36,000, Justice Woods was moved, no doubt, by her view that:
" ... the penalty can be particularly harsh if source deductions have been taken because there is often no intent to avoid the payment of tax. Counsel for Mr. Morgan suggested in argument that the source deductions in this case were sufficient to pay the entire tax owing. This is certainly plausible since Mr. Morgan apparently had no other income in 2009.
" In circumstances such as this, where there is no apparent intent to avoid the payment of tax, it seems excessive to impose a 20 percent penalty on top of Part I tax."
The Department of Finance drafts tax laws. It knows that this rule is harsh but it thinks that it is proper to keep it as it is. For a fuller discussion, see my Canadian Tax Highlights article on the Knight case.
See Morgan v. The Queen, (2013 TCC Woods)