CRA’s 2026 Update to IC01-1R2 Third-Party Penalties: What Canadian CPAs Need to Know About Third-Party Penalties Under s. 163.2

— March 24, 2026 —

On February 17, 2026, the Canada Revenue Agency (CRA) released a substantially revised version of Information Circular IC01-1R2, which provides detailed guidance on the application of third-party civil penalties under section 163.2 of the Income Tax Act (ITA). This update is particularly relevant for Canadian CPAs in public practice, as it clarifies the scope, standards, and practical implications of these penalties for tax advisors, preparers, and planners.

Below, we break down the key elements of the revised Circular, focusing on the core concepts of culpable conduct, excluded activity, subordinate, and the main operative subsections: 163.2(1), (2), (4), (5), (8), and (12).

1. Overview: The Two-Tier Penalty System
Section 163.2 establishes two distinct third-party penalties:

• Planner Penalty (s. 163.2(2)): Targets those who make, furnish, participate in, or cause another to make or furnish a false statement in the course of a “planning activity” or “valuation activity.” This is aimed at those who design, promote, or sell tax planning arrangements.
• Preparer Penalty (s. 163.2(4)): Applies to those who make, participate in, assent to, or acquiesce in the making of a false statement to or by another person, typically in the context of preparing or assisting with tax filings.

The distinction is important: the planner penalty is generally for those involved in the creation and promotion of tax schemes, while the preparer penalty is for those providing tax-related services to taxpayers, such as preparing returns or supporting documentation.

2. Culpable Conduct (s. 163.2(1))
A central concept in the application of third-party penalties is “culpable conduct.” The revised Circular reiterates that culpable conduct is a higher standard than simple negligence and is defined as conduct that is:

• Tantamount to intentional conduct;
• Shows an indifference as to whether the ITA is complied with; or
• Shows a wilful, reckless, or wanton disregard of the law.

This means that penalties are not intended for honest mistakes or reasonable differences of opinion, but rather for conduct akin to gross negligence or intentional wrongdoing. The Supreme Court of Canada in Guindon confirmed that the standard for culpable conduct is at least as high as gross negligence.

Practical Takeaway: CPAs should ensure that their conduct, and that of their staff, meets or exceeds the professional standards of their governing bodies. The CRA does not expect more than this, but will penalize conduct that falls below this threshold, especially where there is wilful blindness or reckless disregard for the law.

3. Excluded Activity (s. 163.2(1), (7))
The Circular clarifies the meaning of “excluded activity,” which is critical for understanding when certain exceptions (such as the good faith reliance exception) do not apply.
Excluded activities include:

• Promoting or selling (directly or indirectly) an arrangement, entity, plan, property, or scheme where one of the main purposes is to obtain a tax benefit;
• Accepting consideration for the promotion or sale of such an arrangement.

If a CPA is involved in an excluded activity, the good faith reliance exception (s. 163.2(6)) is not available. This is particularly relevant for those involved in the promotion or sale of tax shelters, flow-through shares, or other arrangements designed to deliver tax benefits.

Practical Takeaway: If your practice includes the promotion or sale of tax shelters or similar products, be aware that the usual defences may not be available, and the risk of penalty is heightened.

4. Subordinate (s. 163.2(1))
The definition of “subordinate” is expanded in the Circular. A subordinate is any person whose activities are directed, supervised, or controlled by another, regardless of whether they are an employee. In a partnership, a person is only a subordinate of a particular partner if they report to that partner.

This is relevant for determining whether a person “participated” in the making of a false statement, as participation includes causing a subordinate to act or omit information, or knowing about a subordinate’s participation and not making a reasonable effort to prevent it.

Practical Takeaway: Partners and managers in CPA firms should be vigilant about the actions of their staff and ensure robust supervision and review processes are in place.

5. Key Operative Provisions
a. s. 163.2(2): Planner Penalty
Applies to anyone who makes, furnishes, participates in, or causes another to make or furnish a statement that they know, or would reasonably be expected to know but for culpable conduct, is a false statement that could be used by another person for a tax purpose.
Penalty Amount (s. 163.2(3)): The greater of $1,000 or the total of the person’s gross entitlements for the activity at the time the notice of assessment is sent.

b. s. 163.2(4): Preparer Penalty
Targets those who make, participate in, assent to, or acquiesce in the making of a false statement to or by another person, knowing or being reckless as to its falsity.
Penalty Amount (s. 163.2(5)): The greater of $1,000 or the lesser of (i) the penalty the taxpayer would face for gross negligence, and (ii) $100,000 plus the person’s gross compensation for the false statement.

c. s. 163.2(8): Multiple False Statements
For planner penalties, multiple false statements made in the course of a single planning or valuation activity are deemed to be one false statement for penalty calculation purposes. This does not apply to preparer penalties, where each instance is considered separately.

d. s. 163.2(12): Multiple Assessments
If a person is assessed a penalty and later assessed again for the same activity (e.g., if gross entitlements increase), the later assessment is deemed a separate penalty, but only the increase is subject to the new penalty. This prevents double-counting of amounts already penalized.

6. Practical Guidance and Risk Management

• Document Diligence: The CRA suggests that practitioners make timely notes documenting client information, concerns about accuracy, and steps taken to verify claims. This is especially important if there are any red flags or inconsistencies.
• Good Faith Reliance: While reliance in good faith on client-provided information can be a defence, it is not available in excluded activities or where a reasonable person would have made further inquiries.
• Rectifying Past Errors: If you discover a false statement made by a previous advisor, advise the client to make a voluntary disclosure. If the client refuses, you are not exposed to penalty for the prior years, but must ensure future filings are accurate.
• Firm-Wide Implications: Both individuals and firms (including partnerships and corporations) can be penalized if officers or partners knew or should have known about the false statement. Supervision and internal controls are critical.

7. Conclusion
The 2026 revision to IC01-1R2 provides greater clarity and detail on the application of third-party penalties under s. 163.2. For Canadian CPAs, the key message is that the CRA is focused on deterring serious misconduct—intentional, reckless, or grossly negligent behaviour—rather than honest mistakes. However, the standards are exacting, and the penalties can be severe.

Best Practices:

• Maintain high professional standards and robust documentation.
• Supervise and review the work of subordinates and partners.
• Be especially cautious when involved in the promotion or sale of tax shelters or similar arrangements.
• Take prompt action if you discover past misstatements, and ensure future compliance.

Staying informed and diligent is the best defence against third-party penalties in today’s evolving tax environment.

For further reading, see the full text of IC01-1R2 and the relevant sections of the Income Tax Act.

Stay current with evolving CRA guidance and compliance requirements through AJAG’s practical, verifiable professional development courses – designed for real-world application by Canadian CPAs.

Disclaimer: This article is provided for general information only and does not constitute tax or legal advice. Organizations should consult their professional advisors regarding their specific circumstances.