Canada Tax Court: Kryski v. The King S. 163(1) Due Diligence Defence Fails

• The Canada Tax Court upheld a penalty under s. 163(1) of the Income Tax Act against a taxpayer for repeated failure to report income.
• The taxpayer, in Kryski v. The King, 2026 TCC 145, underreported $501 in 2022 and $12,715 in 2023.
• The $501 unreported income in 2022 exceeded the $500 threshold, triggering potential s. 163(1) penalties for the next three years.
• The court found insufficient evidence for a due diligence defence, noting the taxpayer's knowledge and failure to explain why she didn't contact the CRA or report estimated income.
• This ruling emphasizes the high evidentiary standard for a due diligence defence against s. 163(1) penalties, especially for knowledgeable taxpayers.

This ruling underscores that even a small initial underreporting, such as the $501 in 2022 that surpassed the tax reporting threshold s. 163(1), can trigger a cascade of future liabilities under the repeated failure to report income penalty provisions.

The Canada Tax Court recently affirmed a penalty under section 163(1) of the Income Tax Act, 1985, against a taxpayer in the case of Kryski v. The King, 2026 TCC 145. The appellant had challenged an assessment for a repeated failure to report income penalty, arguing she had exercised due diligence in her tax filings for the 2022 and 2023 taxation years. The court ultimately dismissed her appeal, finding insufficient evidence to support her defence.

The appellant, who primarily earned income from investments, personally prepared her annual T1 returns. These filings typically involved compiling information from approximately 150 slips, predominantly T3 and T5 forms. In 2022, she failed to declare $501 earned from her work as a movie extra. Her explanation for this omission was difficulty in obtaining the relevant T4A slip due to communication issues with the talent agency.

For the subsequent 2023 tax year, the appellant again underreported her income, this time by $12,715. She testified that despite considerable efforts, she was unable to acquire all the necessary investment information required for accurate reporting. These two instances of unreported income formed the basis for the s. 163(1) penalty assessment.

The penalty in question, assessed under Income Tax Act s. 163(1), applies when a taxpayer repeatedly fails to report income. A critical aspect of this provision, as highlighted by the Canada Tax Court unreported income penalty decision, is the establishment of a tax reporting threshold s. 163(1). The court noted that the appellant's $501 in unreported movie extra income in 2022 exceeded the $500 threshold. This seemingly minor discrepancy had significant implications, as it meant she would be exposed to s. 163(1) penalties if she underreported income in any of the subsequent three years.

The application of s. 163 penalties is contingent on specific conditions, as established in Greenstreet v. The Queen, 2008 TCC 159. In the Kryski v. The King s. 163(1) due diligence proceedings, the court clarified that there was no dispute regarding the first three conditions outlined in Greenstreet, with both parties agreeing that the first and third conditions were satisfied. Consequently, the sole determinant for the appellant's liability was whether she could successfully demonstrate that she had exercised due diligence in preparing her 2022 and 2023 tax filings.

Despite the appellant's claims of diligent effort, the Tax Court found the evidence presented to be insufficient to establish a taxpayer due diligence standard Canada defence for either year. The court acknowledged that the appellant had indeed made some attempts to gather the required information for both 2022 and 2023, and she provided minimal documentation detailing the challenges she faced in doing so. However, these efforts fell short of the stringent requirements for an Income Tax Act s. 163(1) defence.

Crucially, the court characterized the appellant as a "very knowledgeable taxpayer," implying a higher expectation for her understanding of tax obligations and available recourse. The judgment pointed to several key failures in her defence. She did not adequately explain why she failed to contact the Canada Revenue Agency (CRA) for assistance in obtaining missing slips. Furthermore, she offered no explanation for not reporting an estimated income amount and subsequently filing an amendment once accurate figures became available. Finally, the court noted a lack of sufficient record-keeping regarding her efforts to secure the necessary tax documentation, which further undermined her claim of due diligence.

The decision in Kryski v. The King, 2026 TCC 145 serves as a critical reminder of the high evidentiary bar for taxpayers seeking to invoke a s. 163(1) due diligence defence against penalties for unreported income. This ruling underscores that even a small initial underreporting, such as the $501 in 2022 that surpassed the tax reporting threshold s. 163(1), can trigger a cascade of future liabilities under the repeated failure to report income penalty provisions.

For taxpayers, particularly those deemed "knowledgeable," this case emphasizes the absolute necessity of meticulous record-keeping and proactive engagement with tax authorities when facing difficulties in obtaining necessary documentation. The court's rejection of the appellant's defence, despite her acknowledged "some effort," highlights that vague claims of difficulty are insufficient. Instead, taxpayers must be prepared to demonstrate concrete, documented steps taken to comply with their obligations, including contacting the CRA or reporting estimated figures, to meet the taxpayer due diligence standard Canada and avoid significant Canada Tax Court unreported income penalty assessments.

This ruling clarifies the high evidentiary bar for a due diligence defence against s. 163(1) penalties for repeated unreported income, particularly for knowledgeable taxpayers, underscoring that even minor underreporting can trigger future liabilities. Lawyers should advise clients on meticulous record-keeping and the stringent requirements for proving due diligence in tax filings to avoid these penalties.

Source: Original reporting via Canadian Legal Newswire