COVID-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.
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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.