Nov 26, 2024
Introduction: An Overview of Case Laws Helps to Understand Circumstances that May Warrant Relief under the CRA’s Taxpayer Relief Provisions for Canadian Taxpayers
Under subsection 220 (3.1) of the Income Tax Act and subsection 281.1 (1) of the Excise Tax Act, the Canada Revenue Agency (CRA) has the discretion to waive or cancel interest and penalty otherwise payable by a taxpayer, subject to a 10-year limitation period. As the legislation provides very little guidance on how the CRA should exercise this discretion, the CRA generally follows and is expected to follow its administrative policy published in the Information Circular IC07-1, Taxpayer Relief Provisions.
Paragraphs 23 to 28.2 of the Taxpayer Relief Provisions provide some guidance on the circumstances that may warrant relief from penalties and interest, which includes extraordinary circumstances, actions of the CRA, inability to pay or financial hardship, and any other circumstances that may justify a taxpayer’s inability to satisfy a tax obligation or requirement.
Extraordinary circumstances, according to the CRA, include, but are not limited to, natural or human-made disasters, such as flood or fire, civil disturbances or disruptions in services, such as a postal strike, serious illness or accident, and serious emotional or mental distress, such as a death in the immediate family.
Penalties and interest may also be waived or cancelled if such amounts arise due to certain CRA actions, such as processing delays that prevent taxpayers from being informed in a timely manner about amounts owing; errors in public materials; incorrect information provided to taxpayers; processing errors; delays in providing information; and undue delays in resolving objections, appeals, or completing tax audits. A taxpayer’s inability to pay or financial hardship is also considered.
The CRA generally takes the position that unless an extraordinary circumstance exists, cancelling a penalty based on an inability to pay or financial hardship would not generally be considered.
Although the Taxpayer Relief Provisions help taxpayers understand the grounds for penalties and interest relief more clearly, the CRA administrative policy does not provide measurable standards to which taxpayers can compare their circumstances. For example, the Taxpayer Relief Provisions does not specify what qualifies as undue delays in resolving an objection or an appeal or in completing an audit.
Moreover, the CRA does not provide processing time estimates for high-complexity tax objections, tax audits, or second review requests. Consequently, it is nearly impossible for taxpayers to evaluate whether an undue delay exists without legal assistance or a solid understanding of tax laws. To understand what circumstances can be considered grounds for penalty and interest relief under the Taxpayer Relief Provisions, it is therefore necessary to review existing jurisprudence.
The following sections of this article will examine case law that provides further guidance and clarifications on what circumstances may or may not warrant relief under the CRA’s Taxpayer Relief Provisions.
Chuenyen v AGC, 2024 FC 1703: A Newcomer’s Lack of Knowledge of the Canadian Tax System Does Not Justify a Taxpayer Relief Request
The Applicant, Ms. Chuenyen, submitted a Taxpayer Relief Application seeking relief from assessed interest and penalties for her 2021 taxation year. Ms. Chuenyen was a new immigrant in Canada and did not fully understand how to navigate the Canadian tax system when she filed her 2021 personal income tax return. She filed her 2022 income-tax return with the help of a volunteer “tax consultant,” and she was unaware of how she could identify errors in the prepared return.
In Ms. Chuenyen’s request, she argued that her lack of knowledge was beyond her control because she was not given information when she came to Canada as a newcomer. The CRA denied the request on the basis that the Applicant had a history of non-compliance and late or outstanding payments, knowingly allowed a balance to remain upon which arrears interest accrued, failed to exercise reasonable care in managing her affairs under the self-assessment system, and did not promptly address delays or omissions. In particular, the CRA took the position that a Canadian taxpayer, even a newcomer in Canada, is responsible for ensuring compliance with the self-assessment system in Canada.
The Court found that the CRA’s decision was reasonable, accepting that the CRA considered all relevant circumstances disclosed in the Applicant’s Taxpayer Relief Request, including the fact that the Applicant was a newcomer in Canada.
However, it is the opinion of our expert Canadian tax lawyers that the Court did not explicitly reject the recent immigration status of a taxpayer as a ground for relief. Rather, the Court in Chueyen simply accepted the CRA’s exercise of discretion, finding that the CRA was reasonable in determining that the Applicant’s recent immigration status alone did not justify the Applicant’s request.
The CRA has nevertheless implied, in 3563537 Canada Inc. v. Canada (Revenue Agency), 2012 FC 1290, citing Kindler v Canada (Minister of Justice), [1987] 2 FC 145, that in evaluating a request for relief, the CRA would consider all relevant factors, including “family circumstances, and the taxpayer’s behavioural, educational, and employment background.” Therefore, it is recommended that a taxpayer should include any information that could justify prior non-compliance, as no single factor is determinative in the CRA’s evaluation of a Taxpayer Relief Request.
Maverick Oilfield Services Ltd. & Latigo Trucking Ltd. v Attorney General of Canada, 2023 FC 1728: Extended Period of Mismanagement of a Corporation by a Negligent CEO Qualifies for Extraordinary Circumstances.
The two cases were part of a consolidated judicial review application of three CRA review decisions to deny Taxpayer Relief Requests submitted by two corporations, Maverick Oilfield Services Ltd. and Latigo Trucking Ltd. The knowledgeable Canadian tax lawyers for the two corporations requested relief primarily due to the mismanagement of their former Chief Executive Officer, which led to non-compliance with payroll remittance obligations.
The CRA granted only partial interest relief on the basis that there were no extraordinary circumstances justifying additional interest relief because 1) the owner of the two corporations bore full responsibility to ensure compliance since there was no alleged fraud involved based on the information provided to the CRA; 2) both corporations had a history of non-compliance during the relevant period of the Taxpayer Relief Request; and 3) no relief should be granted after the former CEO departed.
The court called the above-noted reasons “troubling” and found that the CRA decisions were unreasonable. In particular, the CRA’s reasoning was flawed in concluding that extraordinary circumstances could not be found where non-compliance existed for an extended period and for failing to consider the long-term impact of the financial mismanagement on subsequent taxation years. In other words, the CRA erred in assuming that the damage caused by the negligent CEO ceased immediately upon the CEO’s departure.
Maverick Oilfield Services Ltd. & Latigo Trucking Ltd. confirms a valid argument for corporations to seek relief under the Taxpayer Relief Provisions. Additionally, the case also provides an example applicable to all taxpayers seeking interest and penalty relief; that is, even if an incident happened before the relevant period a taxpayer is seeking relief for, the long-term effect of the incident could serve as a valid justification for the taxpayer’s relief request.
Allen v Canada (Attorney General), 2021 FC 364: Mental Health Conditions Have Long-Term Negative Impact On A Taxpayer’s Ability To Function And To Ensure Compliance
The Applicant was diagnosed with mental illness in the late 1990s. As a result, since 2000, he filed most of his tax returns late, which resulted in assessments of penalties and arrears interest for his 2009 through 2016 personal income-tax returns, and GST/HST returns.
The penalties included late-filing penalties and failure-to-file penalties. In support of his request for relief, the Applicant submitted letters from his family physician, psychiatrist, and social worker, which demonstrated that he experienced “significant issues in addressing his tax returns due to the increasingly debilitating nature of his mental health conditions.”
During the first-level review, the CRA recognized the challenges of the Applicant’s conditions but based the denial of his request on the assumption that “after over 10 years since beginning treatment in 2007, it was reasonable to expect that [the Applicant] would have mechanisms in place to meet his tax filing obligations.” The CRA also found that the Applicant’s ability to maintain a business and earn income demonstrated sufficient functional capacity to manage his tax affairs.
The Applicant submitted a second-level review request, based on the submissions that 1) the Applicant’s attending health care professionals indicated that the Applicant had significant problems addressing his tax matters for many years due to the ongoing mental health conditions, which worsened after the initial diagnosis; 2) the Applicant’s business and income earned from it relied on the generosity of his family and friends; 3) following the stabilization of the Applicant’s mental health conditions, he was subsequently diagnosed with coronary artery disease, which further impaired his ability to function; and 4) the Applicant resorted to using his business line of credit to make payments towards the outstanding penalties and interest, after he had paid all principal tax amounts owing, and the financial burden was physical and mentally stressful, which could force him to lay off his employee and shut down his business.
Despite the Applicant’s well-prepared submissions, the CRA denied his request during the second-level review, relying on the argument that the Applicant should have established a mechanism in place to ensure compliance with his tax obligations after the Applicant began receiving treatment.
The Federal Court rejected this line of argument and found that the CRA’s decision was unreasonable, as the reasons for refusing relief were “not sufficiently transparent, intelligible, or justified in light of the record.” The court noted that in the absence of an explanation in the CRA’s decision, it is unclear why the CRA assumed that the Applicant was capable of setting up a mechanism to handle his tax matters.
Furthermore, the CRA erred by concluding that the Applicant did not exercise reasonable care to comply with his filing obligations, without addressing circumstances detailed in his submission. In particular, the CRA needs to adequately explain how it weighed various factors and circumstances considered in reaching the decision.
Summary: A Taxpayer Relief Request Should Include All Information And Circumstances That May Have Impacted The Taxpayer
There is no exhaustive list of factors and circumstances to be considered when assessing a taxpayer’s request for relief. Jurisprudence establishes that the CRA must weigh all factors and circumstances outlined in a Taxpayer Relief Request and provide clear and justified reasons for its decision.
The CRA, however, is not obligated to consider information omitted from a Taxpayer Relief Request. Consequently, it is important to include in a Taxpayer Relief Request all relevant information and circumstances that may have had any adverse impact on the taxpayer’s management of personal tax affairs effectively. When the CRA fails to justify its decisions, whether it is because the CRA ignores part of the request, provides unintelligible reasons, or makes unfair assumptions, it is a taxpayer’s right to request a second-level administrative review or to seek judicial review of the CRA’s decision.
If you would like to read more about Taxpayer Relief Requests, see also:
- Case Commentary: Onex Corporation v. Canada, 2024 FC 1247 –subsections 220(2.1) and 220(3) of the Income Tax Act Can Grant Relief from Tax Reassessment, Plus Filing Requirements
- What to do When CRA Refuses Taxpayer Relief – A Canadian Tax Lawyer’s Case Commentary on Maverick v HMK, 2023 FC 1728
- Barrs v The Queen: A Canadian Tax Lawyer’s Update on Taxpayer Relief Under s.220(3.1)
Pro Tip – The CRA Must Exercise Discretion Reasonably When Assessing a Taxpayer Relief Request
Under subsection 220(3.1) of the Income Tax Act, the Minister of National Revenue has the unfettered discretion to waive penalties and interest incurred as a result of income tax debt. The Minister of National Revenue exercises her power through the Canada Revenue Agency, via the Taxpayer Relief Program.
The CRA’s decision concerning a Taxpayer Relief Request must be reasonable. If a CRA’s decision denying a Taxpayer Relief Request, entirely or in part, is appealed to the Federal Court, the court will evaluate whether the CRA’s decision was procedurally fair and reasonable based on the evidence presented in the request.
If you have a significant amount of tax debt and would like to seek penalty and interest relief from the CRA, or if your Taxpayer Relief Request was rejected by the CRA, you should contact one of our experienced Canadian tax lawyers. We can provide legal advice on your collection matter, help you understand the circumstances that qualify as grounds for relief, assist you with preparing and filing a Taxpayer Relief Request, and appeal a CRA’s decision denying your Taxpayer Relief Request.
FAQ
Can I Reduce My Tax Liability Via A Taxpayer Relief Request?
A successful Taxpayer Relief Request will result in a partial or complete waiver or cancellation of applicable penalties and interests. However, the principal amount of taxes owing cannot be reduced or waived through a Taxpayer Relief Request. For example, if you failed to file your 2022 income-tax return, which resulted in $10,000 in principal amount of taxes owing, $3,000 in penalties, and an additional amount in arrears interest. If your experienced Canadian tax lawyer submits a successful Taxpayer Relief Request, the CRA may waive the $3,000 in penalties and any arrears interest that have been accrued until the date of the CRA’s decision concerning the Taxpayer Relief Request. The CRA will not reduce principal tax liability through a Taxpayer Relief Request.
How Do I Know If My Circumstances Qualify For Relief Under The Taxpayer Relief Provisions?
You can refer to the CRA’s Taxpayer Relief Provisions when you are self-evaluating your circumstances. In general, extraordinary circumstances (such as natural disasters, serious illness or accident, or civil disturbances), actions of the CRA (including errors in processing, delays in providing information, or undue delays in resolving an objection or an appeal), and your inability to pay or financial hardship, can justify your Taxpayer Relief Request. However, it is ultimately at the CRA’s discretion to decide whether your circumstances justify penalty and interest relief and to decide how much relief is granted. If you have concerns regarding a submitted Taxpayer Relief Request or if you would like to submit a Taxpayer Relief Request, you should contact one of our expert Canadian tax lawyers for legal advice and assistance.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
