A tax dispute is usually won or lost on the evidence. This one ended before any evidence was heard, on the conduct of the litigation process itself. The judgment is worth reading because it sets out, in unusual detail, what a taxpayer is entitled to demand before trial and what happens when those entitlements are ignored.
Key Takeaways
- Three taxpayers brought five appeals disputing gross-negligence penalties under subsection 163(2) of the Income Tax Act (ITA).
- Three examinations for discovery and two orders of the Court failed to produce compliance.
- Justice Patrick Boyle allowed all five appeals as a sanction, calling any lesser remedy pointless on this record.
- The ruling turns on procedure, so it says nothing about whether these taxpayers were negligent.
- Costs went to the taxpayers throughout, including on the motion itself.
What Happened in Choptiany et al. v. The King
Thor Choptiany, Sandra McPherson and Wayne Richter each appealed assessments the CRA had raised against them. Their notices of appeal and the Crown’s replies were filed between 2012 and 2017, and the five files became lead appeals for a much larger group.
A trial was set for five days beginning March 25, 2019. It never happened. Two adjournments and three separate examinations for discovery followed, along with two motions in which the taxpayers asked the Court to make the Crown answer questions and hand over documents. In June 2021 they brought a third motion, this time asking the Court to allow their appeals outright.
Justice Patrick Boyle heard it in Toronto in March 2022, continued by video in April, and released his order on October 5, 2022. The Tax Court granted that motion in full.
The Tax Scheme Behind These Gross Negligence Penalties
The provision behind the assessments targets false statements made knowingly or with a marked departure from ordinary care, not honest errors about the law. The CRA often raises it alongside a reassessment rather than on its own, which is what happened here.
The underlying facts were not sympathetic, and the judgment says so plainly. All three taxpayers had participated in the Fiscal Arbitrators or DeMara Consulting arrangements, which the Court described as resembling the de-taxation practices of sovereign citizens, though with fewer of the cultish trappings. At least one promoter of those schemes has been convicted and jailed.
The returns claimed the filers were acting as agent for themselves and deducted amounts on that footing. Only those charges were in dispute, not the underlying reassessments.
That context matters. The Court allowed appeals it clearly had little sympathy for, and said the result was “the fault of the Respondent alone”. A procedural sanction of this size does not depend on the taxpayer looking blameless.
What the Income Tax Act Says About Gross-Negligence Penalties
Subsection 163(2) is short, but the provisions relating to gross-negligence penalties do a great deal of work. These provisions allow the Canada Revenue Agency to levy the tax penalty upon any taxpayer who makes, or takes part in making, a false statement in a return. The wording is broad, allowing the CRA to impose gross-negligence penalties on a taxpayer who was wilfully blind rather than actively dishonest.
Read plainly, subsection 163(2) permits the Canada Revenue Agency to invoke a gross-negligence penalty when a taxpayer signs a return knowing a statement in it is false, or in circumstances that amount to gross negligence. Honest confusion about the law does not qualify.
Two features set them apart from ordinary late-filing charges:
- Gross-negligence penalties reverse the onus, because subsection 163(3) puts the burden on the Minister rather than on you.
- They are not automatic. The wording of the legislation demands that the Canada Revenue Agency apply these penalties only in those clear cases where intent or a marked departure from ordinary care can actually be shown.
Circumstances Amounting to Gross Negligence Are Never Assumed
These charges also serve a purpose beyond revenue. Gross-negligence penalties serve to reprimand taxpayers whose conduct runs far past carelessness: a disciplinary measure designed to punish exceptional disregard for tax rules rather than to raise revenue. GST gross-negligence penalties are designed on the same pattern, under section 285 of the Excise Tax Act (ETA).
The legislation and jurisprudence concerning gross-negligence penalties both point one way. Intent has to be proved, not assumed. Recording the evidence for it is the proper course when concluding a tax audit, and it is exactly what the taxpayers here wanted to test.
The Amount of the Gross-Negligence Penalty and the Criminal Track
The amount of the gross-negligence penalty under that subsection is broadly 50% of the tax on the understated income, with a $100 floor. Put another way, it is roughly half the income tax that was underreported. That can result in a hefty tax cost on top of the reassessment itself, and interest runs on both amounts.
In practice the Canada Revenue Agency will assess the tax and the penalty together in a single reassessment. The same charge can otherwise apply when other tax issues are under dispute in that reassessment, which is why an objection usually deals with both at once.
The civil penalty also sits beside a separate criminal track. Section 239 of the ITA creates tax-related criminal liability for tax evasion, with fines measured against the income tax that you evaded and the possibility of imprisonment. Different parts of the CRA run the two tracks, which is precisely why the taxpayers in this case wanted to know whether a criminal file on them had ever existed.
How the Canada Revenue Agency Frustrated Discovery Twice
Discovery is where each side must answer proper questions and produce relevant documents before trial. The taxpayers wanted to know whether the CRA had ever investigated them criminally, and what that file contained, because the answer bears directly on what the auditors believed about their intent.
An order in October 2019 required disclosure. A second round in late 2020 confirmed the scope of the first. Yet across three examinations the Crown’s nominee was, in the Court’s words, “uncooperative, obstructive, obfuscatory and evasive”. He had not informed himself about whether investigations into these three individuals even existed. Some answers were wrong and were never properly corrected. Others were “glib and cavalier”, and some looked to the judge like stalling tactics during the tax litigation. The required list of documents was never amended.
Here the CRA not only applied gross-negligence penalties, it then resisted the discovery that would have shown how they were decided. That combination is what turned a document fight into a sanction.
The judge also flagged a broader structural concern in a footnote: because the CRA decides which objections to confirm, it effectively selects which taxpayers reach the Court in a group appeal, leaving others waiting at the objection stage without knowing they can bring their own appeal after 90 days.
Why the Judge Called It Outrageously Misleading and Inappropriate
The sharpest criticism concerned how the Crown quoted the Court’s own order back to it. Words were inserted in square brackets in a way that suggested the judge had named specific people when he had not, narrowing what had to be disclosed.
Justice Boyle rejected the explanation that the Crown had simply been mistaken about what the order meant. He said “this might be contemptuous”, called the conduct “highly inappropriate”, and told counsel he was “deeply, deeply disturbed” by it.
He was equally direct about the failure to prepare a witness. Not knowing whether investigations existed was, he said, “shocking”, and it tainted the whole discovery.
What the Tax Court of Canada Decided in 2022 TCC 112
Section 110 of the Court’s General Procedure rules lets a judge allow an appeal outright where a party refuses to answer a proper question or produce a required document. Sections 116 and 126 carry similar powers, and superior courts also hold inherent jurisdiction over abuse of their own processes.
Justice Boyle found the pattern of non-compliance “intentional and deliberate”, and found it had been undertaken to frustrate the taxpayers’ discovery rights. Having already given two orders and a clear warning, he saw no reason to believe a third would work. His line about the alternative has been quoted ever since: ordering compliance again would “conjure up memories of the Pythonesque skit of the British bobby of another era yelling at a scofflaw: Stop! Stop! Stop, or I’ll yell stop again!”.
The Tax Court of Canada allowed all five appeals, with costs to the taxpayers throughout, and directed the parties to try to agree on the amount. It was conduct in the litigation that compelled the Tax Court of Canada to allow appeals it plainly disliked. The disposition was, he wrote, also necessary “to protect the integrity of the judicial process and the rules of law that apply to all parties”. The full reasons are published as Choptiany et al v. The King, 2022 TCC 112.
What Choptiany Means for Your Own Tax Litigation
Read narrowly, this is an extreme remedy on an extreme record: three discoveries, two orders, a clear warning, and continued default. Read properly, it confirms three things that apply to every file.
First, the burden on a charge of this kind sits with the Crown. Subsection 163(2) applies where a filer makes a false statement knowingly, or under circumstances amounting to gross negligence, and subsection 163(3) of the ITA then puts the burden of establishing the facts justifying the penalty on the Minister. The CRA must prove its case, which is the reverse of the usual position and the reason discovery about the auditor’s own investigation was relevant here.
Because the provisions reverse the onus, the CRA bears the risk of an incomplete record in cases involving gross-negligence penalties. To impose a gross-negligence penalty at all, the Minister has to put facts in front of the Court, and those facts have to survive discovery.
Second, discovery rights are enforceable. Questions must be answered by someone who has informed themselves, and documents on the list must be produced. That obligation binds the CRA and its counsel exactly as it binds you. Where it is not met, the remedies escalate from further discovery to costs to, in the rarest cases, disposition of the appeal.
Third, the record is what earns the remedy. In our CRA representation practice, the files that end well are the ones where every unanswered undertaking, every incomplete answer and every missed deadline is logged in writing as it happens. Justice Boyle could describe a pattern because the taxpayers’ counsel had documented one across four years. A complaint raised for the first time at trial has nothing behind it.
Appeals at this level are usually run by tax lawyers rather than by accountants, and the decision is a useful measure of what their discovery demands are actually worth. Before any of it applies, though, you have to be in the Court. Discovery does not exist at the objection stage, so the sequence still runs through a notice of objection first, and it starts much earlier with how you answer the initial audit letter.
Frequently Asked Questions
What is Choptiany v. The King about?
It is a 2022 Tax Court order allowing five appeals as a sanction for the Crown’s repeated failure to comply with discovery obligations and two orders of the Court. The penalties in dispute were vacated as a result, without any hearing on whether the taxpayers had been negligent.
What are gross-negligence penalties under Canada’s Income Tax Act?
They are civil penalties under subsection 163(2) for false statements made knowingly, or in circumstances that amount to gross negligence. They are not charged for honest mistakes. A parallel rule applies to GST/HST returns under section 285 of the ETA.
What is the burden of proof for gross-negligence penalties?
It rests on the Minister. Subsection 163(3) places the burden of proving the facts justifying the penalty on the Crown, so you are not required to disprove it. The reassessed income itself remains your burden unless it is also under appeal.
How much will a gross-negligence penalty cost me?
Broadly half the tax attributable to the understated amount, with a $100 minimum, and interest on top. On a $60,000 understatement taxed at 40%, the tax is $24,000 and the penalty is about $12,000. Your own numbers will differ, so confirm them with your CPA.
What are the key elements required to prove gross negligence?
A false statement in a return, and a mental element: either knowledge that the statement was false, or conduct so far below the ordinary standard that it amounts to gross negligence. Courts look at education, experience, the size of the error and whether the filer questioned an obviously odd claim.
Can the CRA impose gross-negligence penalties in every case involving a false statement?
No. An error alone is not enough, because the mental element has to be proved separately. That is why documentation of the auditor’s reasoning matters so much when it is challenged.
Does procedural misconduct by the CRA automatically cancel a penalty?
No. Allowing an appeal for default is discretionary and rare. The Court weighs the seriousness of the breaches, whether they were deliberate, the prejudice caused, and whether any lesser remedy could realistically fix the problem.
What should you do if the Crown fails to disclose documents during litigation?
Put the deficiency in writing, identify the specific question or document, and set a deadline. If it is not cured, the next step is a motion for an order compelling answers. Each documented failure builds the record that supports a stronger remedy later.
Does this ruling help me at the objection stage?
Not directly, because discovery rules apply only once an appeal is before the Court. What carries over is the habit of documenting requests and responses, which becomes the evidentiary record if the file later moves to litigation.
The Bottom Line on This CRA Penalty Fight
Choptiany is not a licence to argue procedure instead of substance. It is a reminder that the process has rules that bind both sides, and that a court will enforce them when it has to. No reported Federal Court of Appeal decision has revisited the order, so it stands as an authority on procedure rather than on substantive tax law.
- The appeals were allowed on conduct, not on the merits.
- Deliberate, repeated non-compliance is what moved the Court, not a single misstep.
- The Crown carries the burden on subsection 163(2) penalties, which makes disclosure about the audit itself fair game.
- Costs followed the taxpayers throughout, including on the motion.
Every dispute turns on its own record, and most are resolved long before a courtroom, whether the issue is a penalty, an unreported source, or an account the CRA says was really a business, as in the Ahamed TFSA ruling. If you are already looking at a proposal letter or an assessment you disagree with, our guides to gross-negligence penalties and the types of CRA audits are the place to start, and our audit representation team can review where your file actually stands. Get in touch before you answer the next request.
