When the Canada Revenue Agency reassesses a return and tacks on a penalty under subsection 163(2) of the Income Tax Act, the dollar amount is rarely the worst of it. A 163(2) penalty is, in effect, an accusation that the taxpayer either knew the return was false or was grossly negligent in letting it be filed. That is a serious finding, and the law sets a correspondingly high bar before it can be sustained. The leading authority on where that bar sits is Wynter v. Canada, 2017 FCA 195 — a decision of the Federal Court of Appeal that every taxpayer facing a gross-negligence penalty, and every advisor defending one, needs to understand.
Why does Wynter matter? Because it clarified two related but distinct concepts that the CRA frequently blurs together: wilful blindness and gross negligence. The Court explained that the Crown does not have to prove both — but it does have to prove one of them, and each has its own test. Get the distinction right and a penalty that looked unbeatable can fall away. This is a comment on that public decision and what it means in practice.
The facts
Rosetta Wynter was a long-time taxpayer with a straightforward filing history. In 2006, after receiving an unsolicited phone call from a person unknown to her, she stopped using the accountant who had prepared her returns for years and began using a tax-preparation operation known as DSC Lifestyle Services. Over the following years she paid DSC roughly $12,000 for its services, part of which she understood to be a charitable donation.
The arrangement produced dramatic results. For her 2009 taxation year, her return reported a business loss of more than $447,000. The difficulty was that there was no business. Ms. Wynter did not dispute that she had never owned or operated the business in question and that there was no basis for the loss. In the years she used DSC, she received refunds far larger than anything she had seen across roughly three decades of filing. The Minister of National Revenue initially processed the loss, then reassessed and imposed a gross-negligence penalty in the order of $51,000 in connection with the false claim.
The DSC scheme was not unique to Ms. Wynter; it generated a number of reassessments and appeals as the CRA worked through returns prepared by the operation. Her case became the vehicle through which the Federal Court of Appeal restated the governing legal test.
The issue
The narrow question was whether the 163(2) penalty on the fictitious business loss should stand. The broader, and more consequential, question was a legal one: what exactly must the Crown establish to sustain a gross-negligence penalty, and how do the concepts of "wilful blindness" and "gross negligence" fit together?
Subsection 163(2) applies where a person "knowingly, or under circumstances amounting to gross negligence," makes or participates in a false statement in a return. The provision is framed in the alternative — knowingly OR gross negligence — and the courts have long treated wilful blindness as a route to establishing the "knowingly" branch. The appeal gave the Court the chance to tidy up language that lower courts had sometimes used loosely, treating the two ideas as interchangeable.
What the Court decided (and why)
The Federal Court of Appeal, in reasons written by Justice Rennie (with Justices Pelletier and Woods concurring), dismissed the appeal and upheld the penalty. In doing so, the Court laid down the framework that now governs 163(2) cases.
First, the Court confirmed that the penalty rests on two distinct bases and that the Crown need only establish one of them. The CRA does not have to prove both knowledge and gross negligence; it is enough to show that the taxpayer either had the requisite knowledge (including through wilful blindness) or was grossly negligent.
Second, the Court drew a clean line between the two concepts:
- Wilful blindness goes to knowledge. A taxpayer is wilfully blind where the taxpayer becomes aware of the need for inquiry but declines to inquire because the taxpayer does not want to know — studiously avoiding the truth. The Court described this as a form of deliberate ignorance. Because it imputes actual knowledge, wilful blindness has a subjective dimension: the question is what this taxpayer suspected and chose not to confirm.
- Gross negligence is assessed against an objective standard. It arises where the taxpayer's conduct falls markedly below what would be expected of a reasonable person in the circumstances. It is more than ordinary carelessness or a simple mistake; it requires a high degree of negligence tantamount to intentional acting or indifference as to whether the law is complied with.
The Court captured the distinction in a memorable formulation: if the wilfully blind taxpayer "knew better," the grossly negligent taxpayer "ought to have known better." One is about deliberate avoidance of a known need to inquire; the other is about a serious departure from the standard of a reasonable taxpayer, measured objectively.
The Court also confirmed that an intention to cheat is not required to establish wilful blindness. The concept is about deliberate ignorance, not proven dishonesty. What matters is whether the surrounding circumstances were suspicious enough that a need to inquire arose, and whether the taxpayer deliberately chose not to look.
Applied to Ms. Wynter, the conclusion followed naturally. A long-time taxpayer with no business suddenly reported a six-figure business loss and received refunds wildly out of line with decades of filings, after switching to an unsolicited preparer that charged thousands of dollars. Those were exactly the kind of suspicious circumstances that called for inquiry. The penalty was upheld.
Why this decision matters / practical takeaways
For taxpayers and advisors, Wynter is more than a statement of principle — it shapes how 163(2) disputes are actually fought and resolved.
- The Crown carries the burden. On gross-negligence penalties, the onus is on the Minister, not the taxpayer, to establish the facts justifying the penalty. That is a meaningful difference from the rest of the assessment, where the taxpayer usually bears the burden of demolishing the Minister's assumptions. Our overview of evidence and the burden of proof in the Tax Court explains how that allocation plays out at trial.
- Naming the right branch matters. Because wilful blindness and gross negligence are different tests, a defence has to engage with whichever one the Crown is actually advancing. Evidence that rebuts deliberate ignorance (the taxpayer genuinely had no reason to suspect a problem) is different from evidence that rebuts an objective gross-negligence finding (the taxpayer's conduct was reasonable in the circumstances).
- Ordinary mistakes are not enough. The Court was clear that 163(2) targets serious conduct — not honest errors, not ordinary negligence, and not simple reliance on a professional that goes wrong without red flags. A taxpayer who made a good-faith mistake, or who relied reasonably on an advisor in the absence of suspicious circumstances, stands on very different ground from a taxpayer who ignored obvious warning signs.
- Red flags drive wilful-blindness findings. Refunds that are out of proportion to a person's history, deductions or losses with no real-world basis, fees calculated as a share of the refund, and unsolicited preparers promising outsized results are the kinds of circumstances courts treat as triggering a duty to inquire. Where those signals are present, simply trusting the preparer is not a complete answer.
- The preparer's conduct is not automatically your conduct. A dishonest or incompetent preparer can create exposure, but the penalty turns on the taxpayer's state of mind and conduct — what the taxpayer knew, suspected, or ought to have known. That is why cases with similar fact patterns can come out differently depending on the individual taxpayer's circumstances.
For anyone already in the system, the practical path is usually an objection followed, if necessary, by an appeal. Our guide to the Tax Court of Canada appeal process and our page on appealing gross-negligence penalties in the Tax Court set out the steps and the deadlines.
How Barrett Tax Law approaches gross-negligence files
Gross-negligence penalty files reward careful, fact-driven work. Because the Minister carries the burden, the first step is to test exactly what the CRA is alleging — wilful blindness, gross negligence, or both — and to see whether the assessor's evidence actually supports the branch being advanced. From there, the work is largely evidentiary: reconstructing what the taxpayer knew and when, documenting the role of any preparer or third party, and identifying whether the circumstances genuinely raised a duty to inquire or whether the taxpayer acted reasonably given what was in front of them.
Our practice in this area includes audit representation during the reassessment stage, defence of gross-negligence penalties, related work on net-worth audits (where these penalties frequently arise), and, where appropriate, appeals to the Tax Court of Canada. In situations where past filings are inaccurate and no enforcement has yet begun, the Voluntary Disclosures Program may offer a route to correcting the record before penalties are in play. We offer a free initial consultation to review the facts and explain the options before any decision is made.
You can read the full decision on CanLII: Wynter v. Canada, 2017 FCA 195.
This article is commentary on a public court decision. It is general information, not legal advice, and outcomes depend on the specific facts of each case.
Frequently asked questions
What is the difference between wilful blindness and gross negligence under subsection 163(2)?
In Wynter v. Canada, 2017 FCA 195, the Federal Court of Appeal explained that the two are distinct. Wilful blindness goes to knowledge: it is deliberate ignorance, where a taxpayer becomes aware of a need to inquire but chooses not to because they do not want to know the truth. Gross negligence is judged objectively against the standard of a reasonable taxpayer: conduct that falls markedly below that standard. The Court summarized it this way — the wilfully blind taxpayer 'knew better,' while the grossly negligent taxpayer 'ought to have known better.'
Does the CRA have to prove both knowledge and gross negligence to impose a 163(2) penalty?
No. Wynter confirmed that subsection 163(2) is framed in the alternative — 'knowingly, or under circumstances amounting to gross negligence.' The Crown needs to establish only one of these, not both. However, the test for each is different, so a defence should address whichever basis the CRA is actually relying on.
Who has the burden of proof on a gross-negligence penalty?
Unlike most of a tax assessment, where the taxpayer generally bears the burden of disproving the Minister's assumptions, on a gross-negligence penalty under 163(2) the onus is on the Minister to establish the facts that justify the penalty. This is an important practical difference in how these appeals are litigated.
Can a taxpayer be penalized for a preparer's mistakes?
The penalty turns on the taxpayer's own knowledge and conduct, not simply on what a preparer did. A dishonest or incompetent preparer can create exposure, but Wynter focuses on whether the surrounding circumstances were suspicious enough to require the taxpayer to inquire — for example, refunds wildly out of line with prior years, or losses with no real basis. Reasonable reliance on an advisor in the absence of red flags is treated very differently from ignoring obvious warning signs.
Is an honest mistake enough to trigger a gross-negligence penalty?
No. The Federal Court of Appeal in Wynter emphasized that these penalties are meant to capture serious conduct — deliberate ignorance or a marked departure from the standard of a reasonable taxpayer — not ordinary negligence, simple carelessness, or honest mistakes. Establishing that an error was a good-faith mistake is often central to defending a 163(2) penalty.
What kinds of facts lead a court to find wilful blindness?
Courts look for suspicious circumstances that should have prompted inquiry. In Wynter, these included a long-time taxpayer suddenly claiming a six-figure business loss for a business that did not exist, refunds far larger than anything received in roughly three decades of filing, switching to an unsolicited tax-preparation operation after a cold call, and paying substantial fees. Where signals like these are present and the taxpayer chooses not to look further, a finding of wilful blindness becomes likely.