Executive Summary: Key Legal and Evidentiary Issues

• CRA was allowed to reassess 2014 and 2015 tax years beyond the normal limitation due to misrepresentations stemming from carelessness or neglect.

• The 2015 T2 return omitted a $6,107,869 taxable capital gain; no one reviewed the final return before filing.

• Appellant and its accountants relied solely on financial statements and the T183 form, not the actual T2, breaching statutory filing obligations.

• CRA’s failure to provide 2012–2013 baseline UCC balances did not excuse the Appellant’s filing errors for 2014 and 2015.

• Court found the failure to review the T2s sufficient to establish neglect but not gross negligence for penalty purposes.

• Gross negligence penalties under subsection 163(2) were vacated; conduct was careless but not tantamount to wilful blindness or intentional disregard.

Facts and outcome of the case

Background and the parties involved
994552 N.W.T. Ltd., part of the Nova Group of companies, was assessed by the Minister for tax years 2014, 2015, and 2016. The company’s principal, Milan (“Mike”) Mrdjenovich, led the enterprise. The dispute concerned the CRA’s reassessments made on September 30, 2019, including an unreported taxable capital gain for 2015, disallowed capital cost allowance (CCA) deductions, and omitted recapture for 2014 and 2015. While the 2016 reassessment was within time and conceded, the company challenged the 2014 and 2015 reassessments on grounds of timeliness and penalties.

The 2015 capital gain and the “inexplicable glitch”
The Appellant included a $6,107,869 taxable capital gain (derived from a gross gain of $12,215,738) in its draft 2015 financial statements prepared by its external accountants, Skolney & Co. However, in subsequent versions, this gain was inexplicably deleted before finalization, a phenomenon referred to by the Court as the “inexplicable glitch.” Neither Zoran Bazdar, the internal controller, nor the external accountants noticed the omission before filing the corporate tax return (T2) and the T183 e-file authorization form. The final 2015 T2 filed omitted the capital gain and the resulting $3 million in tax payable. The Court held that no one reviewed the T2 prior to filing, making the omission a misrepresentation attributable to carelessness.

The CCA and recapture issue for 2014 and 2015
In both 2014 and 2015, the Appellant claimed excess CCA and failed to report recapture, errors linked to unresolved undepreciated capital cost (UCC) balances from 2012 and 2013. The CRA had promised in June 2014 to provide updated balances but failed to do so. Despite this, Zoran directed that the CRA’s corrected values be used in preparing the T2s. Skolney & Co nonetheless filed the 2014 T2 on July 29, 2014, without those updated figures, as the balances had not yet been received. The Court determined that the decision to proceed without verifying the T2 content constituted carelessness, especially given that the T2 is the controlling tax document.

Subsection 163(2) penalties and gross negligence analysis
While the CRA assessed gross negligence penalties for all three years, the Court found these unwarranted. Specifically, the omitted capital gain in 2015 was not subject to penalty. For the CCA and recapture issues in 2014, 2015, and 2016, the Court concluded that while the Appellant’s conduct was careless, it did not rise to gross negligence. The long-standing use of financial statements and the T183 as proxies for the T2, while not ideal, had been standard practice and previously uneventful. The proximity of the CRA’s unfulfilled promise and the complexity of the audit context also served as mitigating factors.

Statutory provisions applied by the Court
The Court applied subsection 152(4)(a)(i) of the Income Tax Act to allow reassessment beyond the normal period due to misrepresentation by neglect, carelessness, or wilful default. It also considered subsection 163(2), which allows penalties for knowingly or grossly negligently made false statements. The Court emphasized that the taxpayer’s legal obligation is to review the T2 return itself before filing; reliance on other documents is insufficient.

Final outcome and judgment
The Tax Court dismissed the appeal with respect to the 2014 and 2015 taxation years, confirming the CRA’s right to reassess based on misrepresentation. However, the penalties for all years were vacated, as the threshold for gross negligence under subsection 163(2) was not met. No costs were awarded due to the mixed outcome, with a right for either party to make written submissions on costs within 30 days of the judgment issued on April 17, 2025.