Subsection 162(7) Penalties and the Due Diligence Defence
One of the most common penalty assessments involves subsection 162(7) of the Income Tax Act. This provision allows the CRA to impose penalties simply because a required return or information return was filed late or unfiled. It applies where no tax was owing, where the taxpayer did not intend to be non-compliant, and even where the underlying tax position is otherwise correct.
Because subsection 162(7) penalties are frequently assessed automatically by the Canada Revenue Agency (CRA), many taxpayers only become aware of the issue after receiving a notice of assessment. At that point, A Toronto tax lawyer can assess the key question of whether the penalty is legally payable, or whether a due diligence defence is available.
Subsection 162(7) Penalty
Subsection 162(7) is a failure-to-file penalty. It applies whenever a person fails to file a return, form, or information return “as and when required” under the Act or its regulations. This includes income tax returns, information returns, and a wide range of compliance filings that carry their own deadlines.
The penalty is calculated at $25 per day for each day the failure continues, to a maximum of 100 days. This results in a maximum penalty of $2,500 per failure. Each late filing is treated separately, which is why subsection 162(7) penalties can escalate quickly where multiple forms or multiple years are involved.
Crucially, subsection 162(7) does not depend on whether tax is payable. A return can be late, fully accurate, and tax-neutral, yet still attract the penalty.
Subsection 162(7) Penalty – Strict Liability Penalty
Subsection 162(7) is generally treated as a strict liability provision. The CRA does not need to show intent, recklessness, or negligence. If the filing was required and it was late, the technical basis for the penalty is usually satisfied.
This is where many taxpayers go wrong. Explanations such as not knowing about the filing obligation, misunderstanding the deadline, being busy, or assuming an accountant handled everything do not, on their own, prevent the penalty from applying.
That said, strict liability does not mean absolute liability. A due diligence defence can still apply, but it is narrow and fact-specific.
Due Diligence Defence – Subsection 162(7) Penalty
To succeed with a due diligence defence, a taxpayer must show that they took all reasonable care to comply with the filing obligation, or that the failure occurred despite reasonable precautions. The focus is on what the taxpayer did before the filing deadline, not how quickly they reacted after receiving a CRA assessment.
Courts look for concrete evidence of proactive compliance. This can include documented systems for tracking filing deadlines, clear and timely instructions to professional advisors, follow-up before the due date, and credible explanations for why those systems failed in circumstances that were genuinely unusual or unforeseeable.
Due diligence is not measured against perfection. It is measured against what a reasonable person in the same circumstances would have done to avoid the late filing.
When Due Diligence Usually Fails
In practice, due diligence arguments fail far more often than they succeed. Courts routinely reject explanations that amount to ignorance of the law, reliance on an advisor without oversight, disorganization, workload pressures, or discovering the obligation only after the deadline passed.
Repeated late filings are particularly damaging. A history of non-compliance undermines any argument that reasonable care was exercised, because prior penalties or warnings should prompt stronger controls, not continued failures.
Where the facts do not support a true due diligence defence, continuing to litigate the penalty can be counterproductive.
Due Diligence Versus Taxpayer Relief
It is essential to distinguish between a legal defence and discretionary relief. A due diligence defence challenges whether the penalty is payable at all and is pursued through an objection or appeal.
Taxpayer relief, by contrast, asks the CRA to cancel or waive penalties and interest based on fairness considerations such as serious illness, extraordinary personal circumstances, or severe hardship. Many cases that fail on due diligence are better suited for a well-prepared taxpayer relief request.
A Toronto tax lawyer can help choose the right path which will save you wasted time and money.
Kirshen Tax Law Can Help
Subsection 162(7) penalties are deceptively simple but legally rigid. The CRA applies them routinely, and courts apply the due diligence defence narrowly. For taxpayers facing these penalties, the most important step is an early, realistic assessment of whether the facts support a true due diligence argument or whether relief should be sought through other channels.
Contact Kirshen Tax Law for a free consultation with a Toronto tax lawyer to help determine the correct strategy before positions are locked in and deadlines are missed.
Jeff Kirshen BA, JD (CA), JD (US)
Tax Lawyer | Founder, Kirshen Tax Law
Disclaimer
The content on this website, including articles and blog posts, is provided for general informational purposes only. It reflects the laws and regulations as of the date of publication, which may have since changed. This content is not intended to serve as legal advice and should not be relied upon as such. Tax laws and situations can be complex and unique to each individual. The information provided may not apply to your specific circumstances. For personalized advice regarding your tax or legal matters, we recommend consulting a qualified lawyer.