by Jeff KirshenCOVID-19 and Taxpayer Relief
In certain circumstances, the Minister of National Revenue may grant relief to a taxpayer where they cannot meet their tax obligations. Relief is discretionary. The Minister has broad discretion to provide relief. For instance, The Minister can provide for the waiver or cancellation of all or part of the penalties and interest payable by the taxpayer. The Minister can also allow an extension of the filing-due date for making certain elections or to amend or grant permission to amend or revoke certain elections. Furthermore, the Minister can authorize a reassessment resulting in a refund of tax or a refund of tax alone to an individual (not applicable for trusts) or certain estates even if an income tax return is filed beyond three years.
A taxpayer must apply for relief under the provisions of the Income Tax Act (the “ITA”) or the Excise Tax Act ( the “ETA”). Relief will be determined by a delegated Canada Revenue Agency (“CRA”) official on a case-by-case basis and depends on the relevant facts and circumstances of the taxpayer’s situation.
CRA Penalties and Interest
The COVID-19 administrative changes extended the filing of returns, forms, elections, and designations to June 1, 2020. No interest or penalties were applied during the extension period. However, interests and penalties were charged if the new deadlines were not met. Taxpayers who filed past the extended deadline would need to apply to the Minister for a waiver of interest and or penalties.
Subsection 220(3.1) of the ITA and section 281.1 of the ETA allow the Minister, through the discretion of the CRA, to cancel or waive all or a portion of the penalties and interest payable by a taxpayer.
CRA Taxpayer Relief – Individuals and Corporations
The ITA and ETA recognize several grounds for relief for individuals. These circumstances include extraordinary factors outside the taxpayer’s control, financial hardship, or actions of the CRA. Applicable extraordinary factors include natural or man-made disasters, disturbances or disruptions in service, serious illness or accident, and or serious mental distress.
Penalties or interest in respect to a failure to file a corporate tax return or to make payment may be waived if the reason was beyond the corporations’ control. These circumstances outside the taxpayer’s control include, floods or fires, civil disturbances, postal strikes, serious illness or accident, the corporation received the incorrect information from the CRA, and natural or human-made disasters. The CRA will also consider relief when a business is experiencing extreme financial difficultly. Where enforcement of penalties would imperil the continuity of operations, result in job loss for employees and significantly impact the community as a whole, the CRA may waive or cancel penalties and or interest even without extraordinary circumstances.
CRA Penalties and Interest
Any penalty calculated on an annual rate is compounded daily. For instance, a nominal annual rate of 3% would be an effective annual rate of 3.045326%. Penalties paid under both the GST/HST legislation and the ITA are non-deductible. The Minister can waive any penalty incurred under the ITA, with the exception of penalties that are enacted as taxes such as Part III tax on excessive capital dividends.
The CRA charges compound daily interest on any late payments. The total owing increases each day and the interest rate applies to the increased balance. The rate changes quarterly as prescribed by the Interest Rates Regulations in both the ITA and ETA.
Due to delays surrounding the measures relating to COVID-19, it is expected that processing times for taxpayer relief requests will be extended. In usual times, it takes approximately 6 to 8 months for a reviewing agent to be assigned to the file and to contact the taxpayer for further details in respect of their application. Once an officer is assigned for review, it takes an approximate 1-3 months for a decision to be rendered.
Even when a taxpayer makes a request for relief, the CRA will continue to charge compound daily interest. Given the current circumstances, processing requests may take over a year. Should relief be granted and the penalties and interests cancelled, the CRA will refund the interest on the penalty and interest amounts.
CRA Taxpayer Relief – 10 Year Limitation Period
The taxpayer has 10 years from the end of a calendar year in which the tax year ended to request relief from penalties. The 10-year limitation also applies for requests to the Minister to accept a late, amended or revoked income tax election, or to request that the Minister issue a refund or make an adjustment beyond the normal three-year assessment period.
For a request to waive or cancel interest under subsection 220(3.1) of the ITA, the Minister may grant relief from accrued interest for the 10 years before the year the request is made for any tax year in which the tax liability arose. This legislative amendment, applicable for requests made on or after June 2, 2011, followed the Federal Court of Appeal decision in Bozzer v Cananda, 2011 FCA 186.
Taxpayer relief requests are processed on a priority basis. Processing delays exacerbated by the measures surrounding COVID-19 may mean greater interest and penalties on any unpaid balances that continue to be compounded daily. However, if relief is granted, a refund of the interest will be issued to the taxpayer.
If you are feeling overwhelmed by the amount of interest and penalties charged to you by the Canada Revenue Agency, we can help! Call us today to learn how we can get them removed!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenParticipating Debt Interest
Participating debt interest and regular interest are treated differently by the Income Tax Act here in Canada. Whether interest is considered to be participating or regular depends on whether certain factors are present in the the repayment of such debt. For example, if money was loaned to someone so that they could go out and buy a rental property, participating debt interest would allow the creditor to make the amount of the interest payments dependent on something, say the profit from the rental property or the cash flow moving through it. It may also be tied to revenue, prices, or a variety of other factors.
Regular interest is when there is a set amount payable to a creditor based on how much was loaned.
Participating Debt Interest and International Taxation
In today’s fast-paced and competitive market economy, many people look past the Canadian border to produce and generate personal and corporate income. This is especially true for both Canadian and U.S residents alike. However, taxpayers often question what tax implications are imposed on income generated outside of the country. For example, many Canadian residents choose to conduct and run their business in the U.S. As such, cross-border business or investment activities could potentially have both U.S and Canadian tax implications.
Normally, when interest payments are made to a resident of another Country, taxes are withheld. Each tax treaty Canada has with other countries must be examined to determine whether withholding is necessary. The type of interest being paid matters for withholding purposes as well.
Participating Debt Interest and the Income Tax Act
Section 212(3) of the Income Tax Act defines Participating Debt Interest as interest (other than certain amounts which are “fully exempt interest”) that is “paid or payable on an obligation, other than a prescribed obligation, all or any portion of which interest is contingent or dependent on the use of or production from property in Canada or is computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion or by reference to dividends paid or payable to shareholder of any class of shares of the capital stock of a corporation. Over the course of the years, the Income Tax Act has undergone many amendments and as a result, withholding from most interest payments to non-residents has been eliminated. However, it is important to note that a taxpayer may subject to withholding tax on interest payments that fall under “participating debt-interest”.
Participating Debt Interest and Withholding Taxes
As of today, if you are earning participating debt interest from another country, that other country will very likely have to withhold taxes before sending you any funds. Under the current rules in Canada, certain payments including standby and guarantee fees are treated for purposes of the Canadian non-resident withholding tax provisions as interest on the related debt that would be, or is, issued. Further, pursuant to the new rules, these payments will also be exempt from Canadian non-resident withholding tax, provided that the recipient deals at arm’s length with the borrower and, where applicable, the amounts are not participating debt interest.
If you are a Canadian tax resident, and you are earning participating debt interest or are thinking about lending funds overseas, call us today! We can assist with putting together a plan to minimize taxation and/or withholding, and we ensure that you fully understand your tax withholding obligations.
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.