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Third-Party Penalties

NO.: IC01-1R2

Date: February 17, 2026

Subject : Third-Party Penalties

Misrepresentation of a tax matter by a third party

Application

1. This circular cancels and replaces Information Circular IC01-1, Third-Party Civil Penalties, dated September 18, 2001. It is only available electronically.

2. This circular examines the third-party penalty provisions in sections 163.2 of the Income Tax Act (ITA) and 285.1 of the Excise Tax Act (ETA). The legislative structures of these sections are very similar with corresponding subsections in each act. Therefore, in this circular reference is made to the relevant subsection or paragraph only. Where there are differences between the two acts, a complete reference is given and discussed. Also, references made to the ETA refer only to the GST/HST provisions found in Part IX of the ETA.

3. Unless otherwise specified, all definitions in this circular are specific to the third-party penalty provisions under subsections 163.2(1) of the ITA and 285.1(1) of the ETA. The term taxpayer also applies to registrants under the ETA.

4. Although a third party may be described by different names in this circular, it should be noted that the third-party penalty provisions apply to anyone who meets the definition of a person in subsection (1). For more information on the definition of a person, go to Part I – Person.  

5. The examples and situations given in this circular are not exhaustive and they are not meant to restrict the spirit or intent of the legislation, or unduly limit the Minister’s discretion.

6. This circular reflects the law in force when it was published. The reader must consider any relevant amendments to statutory provisions or relevant court decisions made after its publication.

Introduction

7. The objective of the third-party penalty provisions under sections 163.2 of the ITA and 285.1 of the ETA, is to deter non-compliance by financially penalizing third parties who knowingly, or due to culpable conduct, provide false statements or omissions that could be used by another person to obtain a tax benefit.

8. The Canadian tax system is based on the principle of self-assessment. Most tax preparers and planners are honest and follow the law. However, there are some that counsel and assist their clients in the making of false statements or wilfully ignore obvious errors when filing returns. Before the third-party penalties took effect on June 29, 2000, there were no administrative penalty provisions that applied to those who:

9. A strong working relationship between tax professionals and the Canada Revenue Agency (CRA) is important for all Canadians and for keeping our tax system fair and effective. When the penalties were proposed in the 1999 federal budget, the CRA consulted with the public, tax communities, and professional organizations to address any concerns. In the initial version of this circular, the CRA committed to applying the penalties fairly, consistently, and only in the most egregious situations. Since then, the CRA has kept that promise and will continue to do so. It is in everyone’s best interest, including that of responsible tax professionals, to recognize that the types of behaviour these provisions target are not acceptable.   

Part I – Penalties

10. The third-party penalty provisions provide two penalties, the planner penalty and the preparer penalty.

11. The planner penalty is directed primarily at any person who generally prepares, participates in preparing, selling, or promoting, either directly or in-directly, a planning activity or valuation activity.

12. The preparer penalty is generally directed at any person providing tax-related services to a taxpayer.

Planner penalty, penalty for misrepresentations in tax planning arrangements

13. The planner penalty under subsection (2) targets third parties responsible for misrepresentations in tax planning arrangements.

14. The planner penalty may apply to:

15. To apply the planner penalty, it is enough that the false statement could be used by another person to obtain a tax advantage under the ITA, ETA, or both. The CRA does not need to identify the person who used, could have used, or relied on the false statement.

Examples of misrepresentations in tax planning arrangements could include:

Preparer penalty, penalty for participating in a misrepresentation

16. The preparer penalty under subsection (4) provides a penalty targeted at third parties who participate in a misrepresentation.

17. The preparer penalty may apply to:

18. To apply the preparer penalty, the CRA must identify each person who used, could have used, or relied on the false statement.

Examples of participating in a misrepresentation could include:

Person

19. For the ITA, subsection 163.2(1) expands the definition of a person beyond the meaning in subsection 248(1) to include a partnership. In this context, a person includes:

20. If a partnership is liable to a penalty under section 163.2, subsection 163(2.9) of the ITA states that the provisions applicable to the following procedures in the ITA apply as if the partnership were a corporation:

21. A trust liable for a penalty under section 163.2 is considered to be an individual pursuant to subsection 104(2) of the ITA.

22. For section 285.1 of the ETA, the term person is defined in subsection 123(1) of the ETA. The definition includes:

Entity

23. An entity includes:

Participate

24. The term participate includes:

Subordinate

25. The term subordinate, in respect of a particular person, includes any person whose activities are directed, supervised, or controlled by the particular person. This definition is not dependent on whether the person is an employee of the particular person or of anyone else, such as in the case of a self-employed person.

26. In a partnership, a person is not considered a subordinate of all the partners simply because they report to one particular partner. A person is only a subordinate of the particular partner if they report to that partner. They are only a subordinate of another particular partner if they also report to that partner.

27. To determine if the particular person participated in the making of a false statement, it may be necessary to establish if a person is considered to be a subordinate of the particular person. This may apply where a particular person, such as a promoter or tax planner, subcontracts certain activities for the making of a false statement to an apparently unrelated person to make it appear that they did not participate in the making of the false statement.

Culpable conduct

28. In the absence of actual knowledge of a false statement, culpable conduct must be present for the third-party penalties to be considered.

29. Culpable conduct, whether an act or a failure to act, is defined under paragraphs (1)(a) to (c) as one of the following:

30. Culpable conduct is a higher and more exacting standard than simple negligence. It is defined with reference to the types of conduct the courts have considered when applying the gross negligence penalties under subsection 163(2) of the ITA. For more information on these court cases, go to Part V - Jurisprudence.

Tantamount to intentional conduct

31. The expression tantamount to intentional conduct in the definition of culpable conduct means conduct that is equivalent to purposefully acting or failing to act.

32. This means that, when looking at a person’s overall conduct, it can be concluded that they intended to make, participate in, or assent to the making of a false statement. 

Indifference

33. The expression shows an indifference as to whether the ITA or the ETA is complied with in the definition of culpable conduct highlights the passive aspect of culpable conduct.

34. This means that the person’s actions, or failure to act, indicate they were wilfully blind to the facts or the application of the tax legislation. The person suspects that certain questions need to be asked but chooses not to ask them so as not to acquire the knowledge of the false statement.

Wilful, reckless, or wanton disregard of the law

35. The expression shows a wilful, reckless, or wanton disregard of the law in the definition of culpable conduct highlights the active aspect of culpable conduct.

36. It refers to the situation where a reasonable and prudent person would know that it is highly likely that a false statement could be made but chooses to proceed with the chosen course of action anyways. In other words, a person shows culpable conduct when they would be expected to be aware of an obvious risk that the statement is a false statement but proceeds without making any attempt to mitigate that risk.

False statement

37. A false statement is an incorrect statement. This includes statements that are misleading because of an omission from the statement, regardless of whether the person making, participating in, or assenting to the making of the statement intended to deceive.

38. For the third-party penalties to be considered, a person must know, or be reasonably expected to know, but for circumstances amounting to culpable conduct, that the statement is a false statement that could be used for a purpose of the ITA, the ETA, or both.

39. Subsection (8) modifies the meaning of a false statement. In general terms, it deems multiple false statements made in the course of a planning activity or valuation activity to be one false statement for the purposes of calculating the planner penalty. This deeming provision does not apply for the purposes of calculating the preparer penalty. For more information on this provision, go to Part III - Penalty Amounts.

40. The third-party penalties are not applied to a false statement resulting of an honest mistake or oversight.

Statement

41. A statement is the act of expressing something in words. It can be any verbal or written declaration, including those in electronic format.

Examples include:

Part II – Exceptions

42. The third-party penalty provisions include exceptions to the application of the penalties. These exceptions are:

Reliance in good faith

43. Subsection (6) provides an exception to culpable conduct for a person (referred to as the advisor in subsections (6) and (7)), acting on behalf of the other person who could use the false statement for tax purposes. This exception only applies to culpable conduct and not to actual knowledge of the false statement.

44. An advisor who relies in good faith on information given to them, by or on behalf of the other person, will not be considered to have acted in circumstances amounting to culpable conduct solely because they rely on this information or, because of their reliance, they fail to verify, investigate or correct the information.

45. In Ploughman v The Queen, 2017 TCC 64 (Ploughman) at paragraph 68, the Tax Court of Canada (TCC) restated the description of good faith as “honesty of intention, and freedom from knowledge of circumstances which ought to put the holder on inquiry.” The good faith reliance exception is available when the information is provided to the advisor by or on behalf of the other person and is not clearly false, obviously unreasonable to a prudent person, or does not raise questions in the mind of the advisor.

46. For more information on the courts’ interpretation of good faith, go to Part V - Jurisprudence.

47. However, an advisor cannot rely on the good faith reliance exception if a diligent and reasonable inquiry should have been made. In other words, a person may not rely in good faith on information if there are any reasons that could lead a reasonable and prudent person to believe the information could be incorrect and that more investigating must be done before it can be found to be credible.

48. In some cases, the advisor will need to verify the accuracy of the other person’s information to be satisfied that the information is credible and consistent with their knowledge. In this case, a record of extra information gathered may be useful if it needs to be referred to at a later date.

49. Subsection (7) provides that the good faith exception in subsection (6) does not apply to statements an advisor makes, participates in, or assents to in the course of an excluded activity. This means that the good faith reliance exception is not available when a person is selling, promoting, or accepting consideration for the promotion or sale of:

Excluded activity

50. The term excluded activity for a false statement means one of the following activities, conducted as either principal or agent, whether directly or indirectly:

51. For the excluded activity definition, an arrangement includes an entity, plan, property, or scheme where it can reasonably be considered that the arrangement is either:

52. As tax shelters and flow through shares are not relevant for GST/HST, only an arrangement where one of the main purposes for participation is to obtain a tax benefit is considered an excluded activity for GST/HST purposes.

53. Generally, the use of rollover provisions, estate freezes, and other conventional tax-planning techniques that are consistent with the intent of the law are not considered excluded activities when the activity is carried on for a fee for a specific client. However, if this tax plan is later promoted or sold to other clients, it would no longer be client specific advice and may be considered an excluded activity.

54. When an activity is an excluded activity, the reliance in good faith and employee exceptions do not apply.

Property

55. For both sections 163.2 of the ITA and 285.1 of the ETA, the term property means property of any kind, as defined under subsection 248(1) of the ITA.

Tax benefit

56. Subsection 163.2(1) of the ITA defines the term tax benefit to mean:

57. Subsection 285.1(1) of the ETA defines the term tax benefit to mean:

Clerical or secretarial services

58. Subsection (9) provides that the third-party penalty provisions do not apply to a person whose participation in the false statement is limited to providing clerical or secretarial services.

59. Clerical and secretarial duties, such as typing or formatting, are considered to be of an administrative nature only without having any regard to content other than to accurately reproduce originals prepared by others.

60. However, bookkeeping or other services that include any involvement in the preparation of financial accounts, such as  recording business accounts and transactions, are not considered to be clerical or secretarial and could lead to the application of the penalties.

Employee exemption

61. Subsection (15) provides that the third-party penalty provisions do not apply to an employee employed by the person who can use the false statement for tax purposes, known as the other person. An employee of the other person is protected by this exemption only to the extent that the false statement could be used by or on behalf of the other person, such as for their employer’s tax returns or information.

62. Under paragraph (15)(b), the conduct of the employee is deemed to be that of the employer for the purposes of applying the gross negligence penalties under subsection 163(2) of the ITA or section 285 of the ETA to the employer.

63. This exemption only applies to employees of the other person and not to the employees of the advisor or the tax return preparer. However, the exemption does not extend to employees of the other person if they either:

64. A specified employee is an employee who either:

65. A specified shareholder is a person who owns, directly or indirectly, at any time during the year, 10% or more of the issued shares of any class of either:

66. Specified employee and specified shareholder are defined under 248(1) of the ITA and apply to both sections 163.2 of the ITA and 285.1 of the ETA.

67. For certain corporate groups, employees of one corporation manage the accounting records, tax planning and tax return preparation for the whole group. These employees are not technically covered by the exemption in subsection (15) when they do work for other members of the corporate group. However, in these cases, the CRA would apply any preparer penalties to the employer, whether a resident or non-resident of Canada, and not to the employee. This is because the employee would be considered to have done this work as part of their job duties.

68. This policy also applies to other groups of organizations that have consolidated or centralized their accounting or tax work in one of their members.

69. However, this policy will not apply if the consolidation or placement of an employee in the consolidated function was done to avoid the third-party penalties or as part of a tax avoidance arrangement.

Part III – Penalty amounts

70. The third-party penalty provisions give clear, quantum calculations to determine the amount of the penalty. Specific mathematical formulas are included depending on which penalty is applicable, either the planner or preparer penalty.

71. For registered charities, if both section 163.2 and subsection 188.1(9) of the ITA apply to a false statement by a person, subsection 188.1(10) limits the person’s liability to the greater of the two penalties.

Planner penalty amount

72. Subsection (3) provides that the penalty to which a person is liable under subsection (2) for a false statement made in the course of a planning activity or a valuation activity is the greater of the two following amounts:

73. In any other case the planner penalty is $1,000.

Two or more false statements

74. When calculating the planner penalty under subsection (3), subsection (8) treats multiple false statements made in the course of a planning activity or a valuation activity as one false statement. This is the case when a person made or furnished false statements in the course of either:

75. For clarification, these arrangements, entities, plans, properties, or schemes include:

Example:

A tax-planning scheme includes two false statements:

76. Under subsection (8), these false statements would be considered to be a single false statement because they all relate to a single scheme.

77. If each person who participated in the scheme paid the person $200 for a total gross entitlements of $1,200, the planner penalty would be $1,200. That is, the greater of either:

78. Subsection (8) does not apply to the preparer penalty imposed under subsections (4) and (5).

Gross entitlements

79. The definition of gross entitlements is important for calculating a planner penalty under subsection (3). Gross entitlements include all amounts the person, or another person not dealing at arm’s length with the person, is entitled to receive in respect of a planning activity or a valuation activity. The amounts can be received or obtained at any time, before or after the activity, either absolutely or contingently.

Planning activity

80. A planning activity includes:

Valuation activity

81. A valuation activity refers to anything done by the person to determine the value of a property or service.

Preparer penalty amount

82. Under the ITA, subsection 163.2(5) provides that the penalty to which a person is liable under subsection (4) for a false statement is the greater of the following two amounts:

83. For this calculation, it is important to note that the gross negligence penalty under subsection 163(2) of the ITA:

84. Under the ETA, subsection 285.1(5) provides that the penalty to which a person is liable under subsection (4) for a false statement is the greater of the following two amounts:

85. To calculate the preparer penalty amount under the ITA and the ETA, each person who used, could have used, or relied upon the false statement constitutes a different false statement. A separate calculation is needed for each instance and the total of these amounts is the total penalty that will be assessed.

Gross compensation

86. The definition of gross compensation is important for calculating a preparer penalty under subsection (5). Gross compensation includes all amounts to which the particular person, or any person not dealing at arm's length with the particular person, is entitled to receive regarding a false statement that could be used by or on behalf of another person. The amounts can be received or obtained at any time, before or after the statement, either absolutely or contingently.

Part IV – Additional assessment rules

87. The third-party penalty provisions provide rules to clarify the amount of the penalty the person would be liable to pay in particular situations. Specifically, subsection (14) outlines the maximum penalty if the person is liable to a penalty under both subsections (2) and (4). Subsections (12) and (13) apply in cases of multiple assessments.

Tie-breaker rule

88. Both the planner penalty under subsection (2) and preparer penalty under subsection (4) could apply to the same false statement. In that case, the tie-breaker rule in subsection (14) determines the maximum penalty the person would be liable to pay. The maximum penalty would be the greater of the total penalty amount under either subsection (2) or (4).

Example:
A planner promotes and sells a tax scheme that creates fictitious tax losses for identifiable participants. In this scenario, the planner penalty calculated under subsection (3) totals $44,000 and the preparer penalty calculated under subsection (5) totals $156,000. The tie-breaker rule under subsection (14) would come into effect and the preparer penalty of $156,000 would be assessed against the promoter.

Multiple assessments

89. Subsection (12) provides special rules for calculating the amount of the third-party penalty the person would be liable to pay in situations subject to multiple assessments.

90. Paragraph (12)(a) applies to cases in which a person is assessed a planner penalty regarding a specific planning activity or valuation activity and, at a later date, is assessed again for the same activity. If the person’s gross entitlements are greater at the later date, subparagraph (12)(a)(i) considers the penalty assessed at the later time to be a separate penalty. In this case, paragraph 12(b) would apply.

91. Paragraph (12)(b) ensures that each planner penalty assessed against a person for the same planning activity or valuation activity excludes the gross entitlements already used in calculating a previously assessed penalty. This means that any future penalty assessments that are due to the increase in the person’s gross entitlements for the false statement would be calculated based only on the amount of the increase and not the person’s total gross entitlements. In general, this rule makes sure that a person’s gross entitlements exclude all amounts already used to calculate a previous planner penalty for which a notice of assessment was already sent to the person.

92. However, if the person’s gross entitlements are lower, or in any other case, then subparagraph (12)(a)(ii) deems the notice of assessment of the earlier penalty not to have been sent and paragraph (12)(b) would not apply. In this case, the planner penalty assessment would be calculated based on the person’s total gross entitlements at the time the later notice of assessment is sent.

Example 1:
A person is assessed a planner penalty at a particular time in the amount of $10,000, representing the amount of the person’s gross entitlements from a planning activity at that time. Later, it is discovered that the person’s gross entitlements from the same planning activity have increased to $25,000 and another assessment of a penalty under subsection (2) is made against the person. In these circumstances, the effect of subparagraph (12)(a)(i) is to deem the second assessment to be a separate penalty and paragraph (12)(b) reduces the person’s gross entitlements by the amount of the initial penalty assessment of $10,000 to $15,000. Taking into account all of the person’s gross entitlements, the end result is that the person is liable to pay two penalties totaling $25,000:

Example 2:
At a particular time the person’s gross entitlements are $700. At that time, the person would have been assessed the minimum penalty amount, under paragraph (3)(a), of $1,000. Later, it is discovered that the person’s gross entitlements from the same planning activity have increased to $25,000. Again, subparagraph (12)(a)(i) deems the second assessment to be a separate penalty and paragraph (12)(b) reduces the person’s gross entitlements by the amount of the initial penalty assessment of $1,000 to $24,000. Taking into account all of the person’s gross entitlements, the end result is that the person is liable to pay two penalties totaling $25,000:

93. In short, the amount of the gross entitlements used for the calculation of the later assessment would be calculated by totaling the gross entitlements to date and reducing that amount by the penalty already assessed.

94. Paragraph (12)(c) deals with the calculation of a preparer penalty. The amount of the gross compensation for the false statement is the total of the gross compensation to date less the amount of the preparer penalty already assessed.

95. If a penalty assessed under subsection (2) or (4) is vacated, subsection (13) deems the penalty assessment to be void.

Part V – Jurisprudence

96. The body of jurisprudence for the third-party penalty provisions is limited as only a few cases to date have been heard by the courts. Although these cases considered section 163.2 of the ITA, the jurisprudence would also apply to section 285.1 of the ETA.

97. The majority decision of the Supreme Court of Canada (SCC) in Guindon v Canada, 2015 SCC 41, (Guindon), confirmed that the section 163.2 penalties do not impose true penal consequences and are administrative, not criminal, in nature. The SCC rejected the argument that the third-party penalty legislation constituted a criminal offence and that those facing the penalties are entitled to the procedural safeguards of the Canadian Charter of Rights and Freedoms.

98. In Guindon, the SCC discussed the concept of culpable conduct, stating at paragraph 58 that the standards for culpable conduct are more exacting than simple negligence. Nevertheless, the SCC held that the third-party penalties are administrative and do not warrant the degree of mens rea as is required in criminal law.

99. The SCC also considered the relationship between culpable conduct and the degree of gross negligence necessary for penalties under subsection 163(2) of the ITA. The SCC noted at paragraph 60 that gross negligence means:

. . . "an indifference as to whether the law is complied with" is more than simple carelessness or negligence; it involves "a high degree of negligence tantamount to intentional acting" . . .  It is akin to burying one's head in the sand . . .

100. The SCC stated at paragraph 61 that the standard for culpable conduct must be at least as high as gross negligence, and that the third-party penalties “. . . are meant to capture serious conduct, not ordinary negligence or simple mistakes on the part of a tax preparer or planner.” The SCC concluded at paragraph 62 that the purpose of the third party penalties is “. . . to promote honesty and deter gross negligence, or worse, on the part of preparers, qualities that are essential to the self-reporting system of income taxation assessment.”

101. The TCC also examined the concept of culpable conduct in Ploughman. At paragraphs 44 to 62, the TCC reviewed the SCC’s discussion of culpable conduct in Guindon and determined that Mr. Ploughman’s conduct was culpable, within the meaning of paragraph (b) of the definition of culpable conduct, in that it was sufficiently serious as to show an indifference as to whether the ITA was complied with.

102. In Ploughman, the TCC also considered the reliance in good faith exception to culpable conduct under subsection 163.2(6) of the ITA. The TCC analysed the text of the provision and noted that in order for the exception to apply:

103. The TCC determined that Mr. Ploughman did not meet these statutory criteria and therefore, the exception did not apply do him.

104. The TCC also reviewed the meaning of good faith, observing at paragraph 67 that in the interpretation of section 163.2 of the ITA “ . . . which is designed to encourage greater care on the part of third parties . . . it is appropriate to apply the narrow objective meaning of “good faith” so as to encourage diligence and reasonable inquiry on the part of those third parties.” The TCC restated the meaning of good faith at paragraph 68 as “. . . honesty of intention and freedom from knowledge of circumstances which ought to put the holder on inquiry.” Applying this objective standard, the TCC determined that Mr. Ploughman did not act in good faith. 

Part VI – Application of the legislation

Considerations

105. When considering the application of third-party penalties, the CRA will continue to respect the intentions of the legislation. Specifically, it is meant to apply to those persons who create opportunities for others to participate in, or assist others in participating in, tax planning arrangements containing a false statement in order to obtain a tax benefit.

106. These planning activities can be either:

107. Tax planning arrangements that comply with the law do not fall within the scope of these penalties.

108. The legislation is also intended to apply to those persons who either:

109. In contrast, the legislation is not intended to apply to:

110. Whether penalties will be assessed in a given situation in which a false statement was made knowingly or in circumstances amounting to culpable conduct will depend upon the facts of the situation. Factors that may be relevant include:

Practitioner professional standards and guidance

111. The CRA recognizes that tax professionals have a responsibility to act in the best interests of their clients, and this includes the right to minimize the clients’ tax liability within the law. The third-party penalty legislation was not enacted to punish those who act honestly and with due care in fulfilling their professional responsibilities. Nor is the intention of the penalty provisions to target those practitioners whose activities are compliant with the ITA and the ETA. Instead, these penalties are meant to impede:

112. In the initial version of this circular, the CRA was asked to give practitioners some guidance on best practices to minimize the risk of a penalty being applied. The CRA does not require more of reputable practitioners than compliance with the professional standards of their governing bodies. Most professional advisors operate in accordance with the codes of conduct, duty of care, and ethical principles well known in these institutions. In that spirit, and recognizing audits generally happen after the fact, it is suggested practitioners make timely notes documenting:

113. If a practitioner believes their client is insisting on using a false or highly suspicious statement to obtain a tax benefit, the practitioner should consider withdrawing from the engagement to eliminate any possibility of being assessed the third-party penalty.

114. A disclaimer of the tax return preparer’s responsibility for information received from the client does not absolve the practitioner from third-party penalties. Likewise, the accountants’ indemnification and limitation of liability clauses in engagement letters or tax services agreements are not considered to be an admission of indifference as to whether there is compliance with the ITA or the ETA.

115. In order for the penalties to apply, there must be a false statement made by a third party knowingly, or in circumstances amounting to culpable conduct, which can be used by another person to obtain a tax benefit. The facts of each situation will be considered individually to determine if the penalty provisions apply.

False statements in previous years

116. If a practitioner discovers that another person made a false statement for tax purposes, the CRA expects practitioners to take the necessary steps to rectify the situation.

Example:
A practitioner gets a new client and finds that the previous accountant made a false statement by not reporting income the client earned from the underground economy.

117. There are two things the practitioner should take into account:

  1. For the previous years, the practitioner should advise their client to make a voluntary disclosure, as described in Information Circular IC00-1R6, Voluntary Disclosures Program. If the client chooses not to follow this advice, the practitioner would not be exposed to the third-party penalties for the previously reported false statements.
  2. Going forward the practitioner is expected to prepare future returns accurately. If the client insists and the preparer knowingly completes the current year return with the false statement, for example without including their underground economy income, both parties would be subject to penalties. The practitioner would be liable for  third-party penalties and the client for a gross negligence penalty under subsection 163(2) of the ITA, section 285 of the ETA, or both.

Persons subject to penalties

118. When two or more persons are involved in the making of a false statement, the CRA may apply the penalties to each.

119. A corporation acts through its officers, (i.e., employees and members of the board of directors). If an officer knew of the false statement or was reasonably expected to know but for culpable conduct, both the officer and the corporation might be exposed to the penalties.

120. For example, a corporation may be engaged in planning, promoting, or selling a tax scheme that manufactures non-capital tax losses for its clients through complex and deliberately misleading transactions. Both the officers and the corporation could be subject to third-party penalties. This would also apply to a partnership, its partners, and employees.

121. However, if the facts show that an employee, officer, or partner had engaged in a situation subject to third-party penalties without the knowledge of the employer, application of the penalties would only be considered against the employee and not the corporation or partnership.

122. It should be noted that the employee exemption, under subsection (15), only applies to an employee of the person who can use the false statement for tax purposes, known as the other person. It does not apply to an employee of the advisor or the tax return preparer.

Non-residents

123. The third-party penalty provisions also apply to non-resident persons. For example, penalties will be applied to a non resident parent if a Canadian corporation files a return containing a false statement knowingly provided by an employee of the non-resident parent, see Employee exemption.

The general anti-avoidance rule

124. The third-party penalty provisions are not intended to apply to arrangements by reason only of a determination that they are subject to the application of the general anti-avoidance rule (GAAR). The GAAR applies only if an arrangement is otherwise technically effective.

125. The third-party penalties can be applied to arrangements involving the application of the GAAR, if the filing position is based on one or more false statements. In addition, the third-party penalties could also be considered if a person takes a filing position contrary to well-settled jurisprudence on the application of the GAAR in circumstances similar to the transaction(s) undertaken by or with the taxpayer.

Other possible liabilities

126. A third-party penalty assessment does not prevent the application of other penalties. For example, if a person provides a false statement to another person and also uses the same false statement to obtain a tax benefit for themselves, they may be liable to both:

127. In addition, a person subject to the third-party penalty provisions could also be subject to criminal prosecution if the activities undertaken on behalf of their client(s) constitute tax evasion, as described in section 239 of the ITA, section 327 of the ETA, or both.

128. At the time this circular was published, the following provinces also have third-party penalty provisions in their provincial tax acts:

129. Depending upon the circumstances, a person may be found liable under one or more of these acts for the third-party penalties.

Price adjustment clause

130. A price adjustment clause, which may be incorporated into an agreement transferring property between non-arm’s length parties, provides for an adjustment to the transaction price if the CRA or a court of law determines that the fair market value of the transferred property is greater or less than the price determined in the agreement.

131. As stated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses, for the CRA to recognize a price adjustment agreement, the CRA will completely evaluate the relevant facts on a case-by-case basis to determine if all of the following conditions were met:

132. A false statement would not have been made and the third-party penalty provisions would not apply if the price adjustment clause was exercised, when:

133. However, if the parties do not agree on the revised fair market value of the transferred property, the conditions noted above would not be met, and the price adjustment clause would not be exercised. There would then be a statement as to the value of the property, which may be a false statement due to the difference between the stated value and the fair market value determined by the CRA, and the third-party penalty provisions may apply.

Reverse onus rule

134. Subsections (10) and (11) provide a reverse onus rule and exception that shifts the burden of proof in the application of the third-party penalties for valuation activities with stated values outside of a prescribed range. At the time this circular was published, the specific percentages had not yet been prescribed. Until the percentages are prescribed by regulation, the reverse onus rule and exception are not applicable. As a result, this circular gives only a brief examination of these subsections. When the prescribed percentages are established, we will provide more information as to how they may apply.

135. Subsection (10) provides a special rule, applicable to valuation activities, that shifts the burden of proof from the CRA to the person who made the false statement. It applies to a statement made by a person who gives an opinion on the stated value of a property or service or by a person who uses that stated value in the course of an excluded activity.

136. This reverse onus rule deems a statement about the stated value to be one that the person would reasonably be expected to know, but for circumstances amounting to culpable conduct, is a false statement, if it is outside the range of specified values.

137. Stated values within the range of the specified values may still be a false statement in some cases, but the reverse onus rule would not be applicable. In those instances, as with any other false statement, the burden of proof would remain on the CRA.

138. The range of values are quantified by paragraphs (10)(a) and (b), with the bottom of the range based on paragraph (10)(a) and the top of the range based on paragraph (10)(b). These calculations are dependent upon the fair market value established by the CRA and the prescribed percentages that, at the time of publication of this circular, have yet to be published.

139. In determining the fair market value of a property or service, the CRA has well-established Real Estate Appraisal and Business Equity Valuation programs that give expert opinions on technical valuation and related issues, and are prepared in accordance with current professional standards and ethics, as set out by:

140. The reverse onus rule, once in effect, would only be invoked after the CRA had used these professional programs in arriving at a fair market value.

141. Subsection (11) provides an exception to the reverse onus rule in subsection (10), where the person who made the valuation statement establishes that:

Part VII – Administration of the penalties

Process

142. The penalties are considered in standalone audits that have a rigorous multi-level approval process. The third-party penalty provisions apply to false statements made after June 29, 2000, and there are no statutory limitation periods or time restrictions applicable to the assessment of these penalties.

143. The person under audit is entitled to have their rights respected and afforded the treatment described in the Taxpayer Bill of Rights. One of these rights is the right to a formal review and to appeal a decision in their file. That is, if the person is not in agreement with the results at the conclusion of the audit, the normal objection and appeal procedures would apply. For more information about filing an objection, go to Objections, appeals, disputes, and relief measures.

144. The third-party penalty provisions only apply if a false statement was made. Therefore, if a taxpayer objects to a tax reassessment resulting from the use of a false statement, it is the CRA’s policy to put any objection filed in regards to the related third-party penalty assessment on hold until the taxpayer’s objection or appeal is resolved.

145. It should be noted that prospective and/or existing electronic filing applicants must meet the suitability screening criteria to be granted access to the EFILE Online services. A person who has been assessed a third-party penalty will not be compliant with these requirements and will have their authorization to participate in electronic filing suspended.

Privacy and confidentiality

146. The right to privacy and confidentiality is one of the underlying principles of the Canadian tax system and auditors must abide by the strict statutory prohibition of the disclosure of taxpayer information under sections 241 of the ITA and 295 of the ETA. As a result, at no time will a taxpayer be informed that the CRA may be gathering information to determine if their advisor or tax return preparer could be subject to the third-party penalty provisions.

147. Due to the nature of the third-party penalty audits, the CRA may be asked to provide taxpayer information to the person under audit. Paragraph 241(4)(b) of the ITA and 295(5)(b) of the ETA provide a very specific and limited exception to this strict rule where the CRA may provide to a person only such taxpayer information as can reasonably be regarded as necessary for the purposes of determining any amount that is or may become payable by the person. It is the responsibility of the CRA to determine the sufficient amount of information that can reasonably be regarded as necessary for the person to understand the CRA’s position.

Burden of proof

148. Gathering relevant and complete information is critical to any review or audit and a third-party penalty audit is no exception. In fact, under subsections 163(3) of the ITA and 285.1(16) of the ETA, it is the responsibility of the CRA to prove, when required to do so in a court of law, that the third-party penalty is applicable and appropriate in a particular situation, with the benefit of the doubt going to the person the penalty was assessed against. The CRA must satisfy the civil standard of proof, by showing on a balance of probabilities that something is probable or more likely than not to have happened.

149. To this end, the CRA has the authority provided by the ITA, the ETA, or both to request or require information for any purpose relating to the administration or enforcement of these acts. Taking the facts and circumstances of the case into consideration, a CRA official will use the means determined to be necessary to gather, from a variety of sources, sufficient audit evidence to meet the burden of proof. This may include issuing a requirement to a third party and/or seeking a compliance order from the courts. CRA officials will exercise judgment, ensuring that the request or requirement for information is reasonable in the circumstances.

150. Under the reverse onus rule in subsection (10), the burden of proof for valuation activities with stated values outside of a prescribed range shifts from the CRA to the third party. However, at the time this circular was published, the specific percentages had not been prescribed and the reverse onus rule is not yet applicable. As a result, until the percentages are prescribed by regulation and subsection (10) is in effect, a false statement in respect of the valuation of a property or service will be treated like any other false statement with the burden of proof remaining on the CRA. For more information about subsection (10) and the exception to the reverse onus rule under subsection (11), go to Part VI – Reverse onus rule.

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2026-02-17