When can the CRA hit a tax preparer with a third party penalty under s.163.2, and how much is it?
As of October 2026, a preparer faces the CRA third party penalty under ITA s.163.2(4): the greater of $1,000 and the lesser of the client's 163(2) penalty and $100,000 plus gross compensation. It applies if the preparer knew the statement was false, or would have but for culpable conduct, a bar at least as high as gross negligence.
How much is the preparer penalty, and how much is the planner penalty?
Section 163.2 holds two penalties. The planner penalty in s.163.2(2) hits whoever makes or furnishes a false statement that another person could use for a purpose of the Act. The preparer penalty in s.163.2(4) hits whoever makes, participates in, assents to or acquiesces in a false statement made to, by or on behalf of another person laws-lois.justice.gc.ca.
| Planner penalty | Preparer penalty | |
|---|---|---|
| Provision | ITA s.163.2(2) and (3) | ITA s.163.2(4) and (5) |
| Typical target | People who plan, promote, sell or value an arrangement | People who prepare a return, invoice or other statement for a specific person |
| Amount | Greater of $1,000 and gross entitlements from the planning or valuation activity; $1,000 flat in any other case | Greater of $1,000 and the lesser of the other person's 163(2) penalty and $100,000 plus gross compensation |
| Several false statements | Statements in one planning or valuation activity count as one (s.163.2(8)) | Each person who used or could have used the statement is a separate penalty, then totalled |
| Must the CRA identify who used it? | No | Yes |
| GST/HST twin | ETA s.285.1(2) and (3), same formula | ETA s.285.1(4) and (5): 50% of the understatement replaces the 163(2) amount |
| Both apply to one statement | You pay the greater of the two totals, not both (s.163.2(14)) | Same rule |
Gross entitlements are everything the planner, or someone not at arm's length with them, is entitled to for the activity, received or receivable, absolute or contingent, measured when the notice of assessment is sent. Gross compensation is the same idea for the preparer: amounts entitled because of the false statement laws-lois.justice.gc.ca. The CRA's own example: participants pay a planner $200 each, gross entitlements reach $1,200, and the planner penalty is $1,200 because it beats the $1,000 floor
canada.ca.
When does a preparer cross the line into culpable conduct?
Without actual knowledge, the CRA has to show culpable conduct: an act or failure to act that is tantamount to intentional conduct, shows indifference to whether the Act is complied with, or shows a wilful, reckless or wanton disregard of the law laws-lois.justice.gc.ca. The CRA reads the indifference limb as wilful blindness, choosing not to look at facts you suspect, and the disregard limb as pressing on when a reasonable person would see a false statement as highly likely
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The bar is high. Citing Guindon v. Canada, 2015 SCC 41, the CRA says culpable conduct must be at least as high as gross negligence and is meant for serious conduct, not ordinary negligence or simple mistakes. The same decision held these penalties are administrative, not criminal canada.ca. Honest mistakes, bona fide differences of interpretation where the law is unsettled, and positions the CRA accepts administratively are all outside the penalty.
What crosses it, in the CRA's preparer examples: an accountant who prepares a return with inflated expenses for a specific taxpayer, and a person who supplies falsified invoices to support a particular corporation's return canada.ca. The word "participate" also reaches the firm owner: it includes causing a subordinate to make the statement, and knowing a subordinate is involved without making a reasonable attempt to stop it
laws-lois.justice.gc.ca.
What does the preparer penalty cost on $20,000 of invented expenses?
Your client's 2025 return reports $130,000 of taxable income after the preparer added $20,000 of expenses that never happened. The client's own 163(2) amount drives the preparer penalty, and it's computed by adding the understatement to the taxable income reported and taking the extra federal tax laws-lois.justice.gc.ca. For 2025 every dollar from $114,750.01 to $177,882 is taxed federally at 26%
canada.ca. The preparer billed $900 for the return.
| Step | Amount |
|---|---|
| Taxable income reported | $130,000 |
| Add the invented expenses | $20,000 |
| Recomputed taxable income | $150,000 |
| Extra federal tax ($20,000 at 26%) | $5,200 |
| Client's 163(2) amount (50%) | $2,600 |
| $100,000 plus $900 gross compensation | $100,900 |
| Lesser of $2,600 and $100,900 | $2,600 |
| Greater of $1,000 and $2,600: preparer penalty | $2,600 |
Now the same trick on 25 clients with identical numbers. Each client who used the statement is a separate penalty, so the total is 25 times $2,600, or $65,000 canada.ca. The client's 163(2) penalty doesn't have to be assessed for this math; the CRA treats it as a purely quantitative figure based on the tax benefit.
Two ends of the range. A client in the 14.5% bracket with $3,000 of invented expenses has a 163(2) amount of $217.50 (half of $435), so the $1,000 floor applies. A client whose 163(2) amount would be $180,000, with a $5,000 fee, hits the cap: the lesser of $180,000 and $105,000 is $105,000. See the gross negligence penalty page for the full 163(2) mechanics.
Does good faith reliance on your client's numbers protect you?
Only up to a point. Under s.163.2(6), an advisor acting for the other person isn't culpable solely because they relied in good faith on information provided by or for that person, and s.163.2(7) removes that protection for statements made in an excluded activity laws-lois.justice.gc.ca. An excluded activity is promoting or selling a tax shelter, flow through shares or an arrangement where a main purpose is a tax benefit. A rollover or estate freeze for one client usually isn't, but promoting the same plan to other clients can make it one
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The CRA says reliance fails where the information is clearly false, obviously unreasonable, or raises questions a prudent person would investigate, and it never covers actual knowledge canada.ca. What it expects in your file:
| Expectation in IC01-1R2 | What it means for your file |
|---|---|
| Verify where needed | Check that client figures are credible and consistent with what you know |
| Keep timely notes | Client information, your accuracy concerns, the questions you asked and the answers |
| Record research and rationale | Why each statement and assumption was made |
| Consider withdrawing | When the client insists on a false or highly suspicious statement |
| Don't lean on disclaimers | A disclaimer of responsibility for client information doesn't absolve you |
Who is exempt: clerks, bookkeepers, employees?
Clerical and secretarial work is exempt under s.163.2(9), but the Act carves out bookkeeping laws-lois.justice.gc.ca. The CRA treats typing or formatting a document without regard to its content as clerical, and recording a business's accounts and transactions as not clerical, so a bookkeeper can be assessed
canada.ca.
The employee exemption in s.163.2(15) protects employees of the taxpayer who uses the statement, for that taxpayer's own returns and information laws-lois.justice.gc.ca. It doesn't protect employees of an advisor or tax return preparer, employees in an excluded activity, or specified employees: those not dealing at arm's length with the employer, or specified shareholders owning 10% or more of any class of shares
canada.ca. So your firm's staff accountant isn't covered by it, while your client's controller usually is.
How does the CRA assess the penalty, and how do you dispute it?
There's no statutory limitation period: the penalties apply to false statements made after June 29, 2000, and the CRA can assess them at any time. They come out of standalone audits with a multiple level approval process, and your clients aren't told you're under review canada.ca. The circular in force is IC01-1R2, last updated February 17, 2026
canada.ca. It cancels and replaces the September 2001 version
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You object and appeal the usual way; the notice of objection deadline page has the timing. If the client is also disputing the related reassessment, the CRA holds your objection until that dispute is resolved. The CRA bears the burden of proof on a balance of probabilities canada.ca. One practical cost lands right away: a person assessed a third party penalty fails the EFILE suitability screening and has their electronic filing authorization suspended.
Valuators get a special rule on paper only. Section 163.2(10) deems a value outside a prescribed percentage of fair market value to be false, with a defence in s.163.2(11) for a reasonable value given in good faith laws-lois.justice.gc.ca. The CRA confirms that reverse onus isn't in effect yet, because the percentages haven't been prescribed
canada.ca.
Sources
Does the CRA have to assess my client a gross negligence penalty before it can penalize me?
No. The CRA uses the 163(2) amount as a number based only on the tax benefit the false statement would produce, and that penalty doesn't need to have been assessed against your client canada.ca.
Can a blog post, seminar or social media video trigger the planner penalty?
Yes. The CRA's planner examples include promoters holding seminars on how to hide income and assets, and an influencer posting misinformation about tax obligations on social media, and the CRA doesn't have to identify anyone who used the statement for the planner penalty canada.ca. Planning that relies on reportable transactions may also need an RC312 under the mandatory disclosure rules.
Is the GST/HST version calculated the same way?
Almost. ETA s.285.1(5) charges the greater of $1,000 and the lesser of $100,000 plus gross compensation and 50% of the understated net tax, tax payable or excess rebate, and s.285.1(16) puts the burden of proof on the Minister laws-lois.justice.gc.ca. That 50% is double the 25% rate in the ordinary s.285 gross negligence penalty.
What if I find a false statement the client's previous preparer made?
Advise the client to make a voluntary disclosure. If the client declines, you aren't exposed for the returns already filed, but you must prepare accurate returns from here on, and knowingly filing a false statement at the client's insistence exposes you both canada.ca.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.