CRA penalties — false statements, repeated failures, and gross negligence
Penalties
Section 163 imposes financial penalties for failure to report income, repeated omissions, and false statements or omissions made knowingly or under circumstances amounting to gross negligence.
Plain-language explanation
Section 163 creates penalties on top of the tax and interest you owe when CRA finds unreported income or incorrect claims.
s.163(1) — Failure to report income (repeated): A 10% federal penalty applies if you fail to include income in your return AND you failed to report income in any of the 3 preceding years. The penalty is 10% of the unreported amount. Most provinces add a matching 10% provincial penalty — combined penalty can be 20% of the unreported income.
s.163(2) — Gross negligence and false statements: A 50% federal penalty applies if you make a false statement or omission in your return "knowingly or under circumstances amounting to gross negligence." This is a severe penalty — CRA must prove intent or recklessness. The penalty is 50% of the additional tax owing from the false statement.
Voluntary disclosure: If you come forward before CRA contacts you (under the Voluntary Disclosures Program, VDP), CRA can waive the s.163 penalties. You still pay the tax plus interest, but you avoid the penalty. The VDP requires full disclosure of all non-compliance.
Interest: In addition to penalties, CRA charges compound daily interest at prescribed rates (currently around 9% annually) on all unpaid amounts from the original due date. Interest is not deductible.
Example
Tom failed to report $30,000 of freelance income in 2024. He also failed to report income in 2023. CRA applies s.163(1): 10% federal penalty × $30,000 = $3,000, plus Ontario 10% = $3,000. Total penalties: $6,000, in addition to the tax on $30,000 plus interest.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
Voluntary Disclosures Program (VDP) overhauled. CRA introduced a two-tier system: the General Program (full penalty waiver) and the Limited Program (no penalty waiver) for cases involving large amounts, deliberate non-compliance, or corporations with over $250M in assets.
Before
Single VDP stream with broad penalty waiver for qualifying applicants
After
Two-tier system: General Program (full waiver) and Limited Program (partial relief only — no interest waiver, no penalty relief)
CRA announced COVID-19 penalty and interest relief for taxpayers who were unable to comply due to the pandemic. Penalties under s.163(1) could be waived for the 2019 tax year in appropriate circumstances under the taxpayer relief provisions.
Before
Standard s.163(1) repeated failure penalty applied automatically
After
COVID administrative relief available; taxpayers could request cancellation of penalties through taxpayer relief (s.220(3.1))
Common questions
What is the gross negligence penalty? +
50% of the federal tax owing on the unreported or incorrectly reported amount. CRA must prove you "knowingly or under circumstances amounting to gross negligence" made a false statement. This is a high bar — but deliberately claiming false deductions or not reporting large cash income can meet it.
Can I avoid penalties by filing a voluntary disclosure? +
Yes. The CRA Voluntary Disclosures Program (VDP) waives penalties if you come forward before CRA contacts you. You pay the tax plus interest, but avoid s.163 penalties. There is a "general program" (full penalty waiver) and a "limited program" for repeated or deliberate non-compliance (partial relief).
Does CRA charge interest on top of penalties? +
Yes. CRA charges compound daily interest at the prescribed rate (around 9% annually) on all unpaid tax, penalties, and interest from the original due date. There is no interest on penalties themselves, but interest accrues on the underlying tax.
Key terms
Related sections
CPA recommendation
If you have unreported income or incorrect returns, consider a Voluntary Disclosure before CRA contacts you. A CPA or tax lawyer experienced in VDP can help maximize the relief available.
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 163. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.