Anna Malazhavaya

The corporate taxpayer transitioned to a perpetual inventory tracking system, resulting in an accounting error where the cost of certain inventory was not recognized in the years it was sold (2010 and 2011).

In 2012, the taxpayer attempted to correct this by writing down the value of the inventory and deducting its cost as a compensatory adjustment.

The Minister reassessed to disallow the deduction.

The Tax Court of Canada dismissed the taxpayer's appeal, holding that under the Income Tax Act, inventory can only be written down if it is held for sale, and the cost of inventory can only be deducted in the year it is sold, regardless of whether the adjustment was consistent with GAAP.

The appellants appealed penalties assessed by the Minister of National Revenue under subsection 163(2) of the Income Tax Act for fictitious business and capital losses reported in their 2010 tax returns.

The returns were prepared and filed by a third-party tax preparer, DeMara Consulting Inc., without the appellants' review or signatures.

The Tax Court of Canada found that the Minister failed to prove that the appellants knowingly made false statements or were wilfully blind, as they did not review the returns and relied on the preparer.

The Court also found that the appellants were not grossly negligent.

The appeals were allowed and the penalties were vacated.