The Canada Revenue Agency (“CRA”) often applies penalties when a taxpayer has failed to comply with their obligations under the Income Tax Act, Excise Tax Act and other acts which the CRA administers.[1] The CRA can apply penalties for late-filing returns, repeatedly late-filing returns, failing to report income, deficiencies in foreign reporting obligations, for being grossly negligent, etc. Interest (currently, 5 percent which compounds daily) is automatically assessed on any debt owed to the CRA (interest is also charged on penalties).
Generally, if a taxpayer has been assessed or reassessed, he/she has two options for addressing the CRA debt: one, file an objection (if in time) and address the tax owing and two, if the taxpayer generally agrees with the principal tax owing, but disagrees or is unable to pay the interest and/or penalties, the taxpayer can apply to have the CRA waive or cancel the interest and/or penalties.
Subsection 220(3.1)
Subsection 220(3.1) provides the CRA with the discretion to waive or cancel interest and penalties, which became payable in the previous ten years (for example, taxpayers have until December 31, 2018 to request relief for interest accrued during the 2008 calendar year or a penalty applied in 2008).
The CRA uses subsection 220(3.1) to administer its voluntary disclosure program
Application for Interest and/or Penalty Relief
In order to administer the provision (and other provisions which together are referred to as “Taxpayer Relief” legislation), the CRA has published a guide for applying for taxpayer relief (ICO7-1R1, “Taxpayer Relief Provisions”).
In the publication, the CRA provides guidelines for when it will provide relief. The CRA will consider granting taxpayer relief in the following circumstances:
- The taxpayer has experienced extraordinary circumstances which interfered with meeting their tax obligations;
- Actions of the CRA (providing incorrect information or delay) are responsible for the arrears; and
- Inability to pay or financial hardship.
The guidelines are not law and the CRA is not permitted to deny a request or exclude it from proper consideration simply because the taxpayer’s circumstances do not meet the guidelines.
After receiving an application, the CRA will assign a “taxpayer relief agent” (usually about one year after receiving the application) to review the application. The agent may contact the taxpayer or his/her representative to request further information. After the agent’s review, she/he will allow the application in full (ie, all interest and penalties for which the taxpayer sought relief from will be cancelled), in part or not at all. If relief is denied or the taxpayer is not content with the amount of relief granted, the taxpayer can apply for a “second level review.” Effectively, the taxpayer re-sends the application to the CRA and another taxpayer relief agent reviews the application.
Judicial Review
If after applying for relief and after a second level review, the taxpayer has not been granted any relief or is not content with the amount of relief, the taxpayer can have the CRA’s decision reviewed in Federal Court. It is not possible to appeal a taxpayer relief decision to the Tax Court of Canada. It is generally not possible to advance new arguments or introduce new evidence when the Federal Court is reviewing the CRA’s decision. The Federal Court’s inquiry looks to whether the CRA’s decision is reasonable. Reasonableness is concerned mostly with the existence of justification, transparency, and intelligibility within the decision-making process. Because a litigant is generally prevented from introducing new evidence or arguments, it is important to make the strongest possible argument at the CRA level.
[1] For the purposes of this discussion, I will discuss interest and penalty relief in the context of the Income Tax Act, RSC 1985, c 1 (5th Supp).