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If you forget to report some of your income on your tax return, you’ll be able to avoid a penalty the first time around. But, if you get caught a second time, you could be hit with a “repeated failure to report income” penalty, even if the omission was due to a purely innocent mistake.

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That’s what happened to one taxpayer who appeared before the Tax Court in Vancouver in late June asking the court to cancel a penalty the Canada Revenue Agency assessed for failing to report all her income on her 2023 return. Before jumping into this recent case, let’s review the rules for omitting income.

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Under the Income Tax Act, if you fail to report at least $500 of income in a tax year, and in any of the three preceding taxation years, you can be hit with a “repeated failure to report income” federal penalty. For example, if you forgot to report more than $500 of income you received in 2025, and also forgot to report more than $500 in income in any of your 2022, 2023 or 2024 returns, you can be hit with this failure-to-report penalty.

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The penalty is calculated as the lesser of 10 per cent of the unreported income, and 50 per cent of the difference between the understatement of tax (or the overstatement of tax credits) related to the omission, and the amount of any tax paid in respect of the unreported amount, for example, by an employer through source deductions withheld. A corresponding provincial 10 per cent penalty is also often assessed.

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A taxpayer will not be penalized, however, if they can demonstrate that they exercised a requisite degree of due diligence.

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In this case, the taxpayer had substantial knowledge and experience of Canadian income tax rules, as she held a chartered accounting designation. Her income for the 2022 and 2023 years came from numerous investments. To prepare her annual tax return, which she did herself, she had to include the information from about 150 tax slips (mostly T3s and T5s) which reported her investment income.

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In 2022, the taxpayer also earned $501 working as a movie extra. She was paid through a talent agency. The taxpayer testified that the talent agency was difficult to communicate with, so she could not obtain her T4A slip setting out the total amount she was paid. The result was that she failed to report the $501 amount as income in her 2022 filings.

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At trial, the judge questioned why the taxpayer didn’t simply obtain this information from her own bank statement or attempt to estimate an income amount for her movie extra work on her tax return. She did not provide a clear answer.

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This unreported $501 of income in 2022 was just over the threshold of $500 to bring the omission penalty into play in a future year. As a result, if she were to underreport income for any of the following three years, she would be liable for the penalties. And, this is what ultimately happened as the taxpayer failed to report $12,715 in income on her 2023 return.

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She testified that she made great efforts in 2023 to obtain all her investment information, but was unsuccessful in doing so, “through no fault of her own.” Indeed, each year the taxpayer struggled to obtain all her T3 slips in a timely manner to meet the April 30 annual tax filing deadline. She testified that obtaining the necessary slips from her investment broker was a consistent problem.