On August 31, 2017, the Tax Court of Canada released a judgment Chiang v. The Queen (2016-2715(IT)I where Sommerfeldt J. canceled late filing penalties under section 204.3 and section 162(1) of the ITA.In brief, the appellant, Mr. Chaing, over-contributed to his RRSPs during the period from 2004 through 2013 taxation years. The minister assessed the appellant for the over-contribution and with the late-filing penalties.

Sommerfeldt J. confirmed the correctness of the Minister’s calculation of the over-contribution but canceled the penalties because:

“Mr. Chiang had conscientiously tracked his RRSP contributions and was genuinely of the view that he had not made any over-contributions to his RRSP. Accordingly, based on his understanding, there was no need to file a return pursuant to paragraph 204.3(1)(a) of the ITA.” [1]

Sommerfeldt J allowed the appeal after considering the ruling in La Souveraine[2] that confirmed the relevant legal test applicable to the due diligence defense that Mr. Chiang successfully pled in this appeal. La Souveraine states:

“The due diligence defense is available if the defendant reasonably believed in a mistaken set of facts that, if true, would have rendered his or her act or omission innocent. A defendant can also avoid liability by showing that he or she took all reasonable steps to avoid the particular event…. The defense of due diligence is based on an objective standard: it requires consideration of what a reasonable person would have done in similar circumstances”

Although Mr. Chiang was ultimately responsible for the principal tax and interest payable as a result of his over-contributions, the Tax Court correctly held that whenever taxpayers provide a reasonable explanation for their error or omission in their tax filings, penalties should not be imposed. Rather, only in instances when a reasonable explanation is not provided, should the penalties be applied.


[1] Para 23, Chiang v. The Queen 2016 – 2715 (IT) I

[2] La Souveraine, Compagnie d’assurance générale v Autorité des marchés financiers, [2013] 3 SCR 756, 2013 SCC 63, ¶56. See also The Queen v The Corporation of The City of Sault Ste. Marie, [1978] 2 SCR 1299, 85 DLR (3d) 161.