Introduction - Tax Remission Order
The Income Tax Act contains provisions that are carefully crafted and precisely designed to provide taxpayers with various avenues to resolve their tax issues. However, in certain circumstances, the Income Tax Act does not provide taxpayers with adequate relief, or the strict application of its provisions can lead to unfair results.
A tax remission order is a taxpayer's s last resort for relief from tax debt and enforced penalties (including interest), where all other avenues for taxpayer relief have been exhausted. Under subsection 23(2) of the Financial Administration Act "the Governor in Council may [..] remit any tax or penalty, including any interest pay or payable thereon, where the Governor in Council considers that the collection of the tax or the enforcements of the penalty is unreasonable or unjust or that it is otherwise in the public interest to remit the tax or penalty." However, because tax remission orders are discretionary, they are only granted in extraordinary circumstances. If you have exhausted all taxpayer relief avenues, it is highly recommended that you contact one of our certified specialists in taxation Canadian tax lawyers for appropriate tax guidance with respect to a possible tax remission order application.
Application for Tax Remission Order - The Process
A taxpayer seeking a tax remission order must begin by submitting an application to the Director of his or her Tax Service Office requesting a tax remission order. The director will either recommend for or against the remission order. If the director recommends in favour of the tax remission order, the taxpayer's application will be forwarded to the Headquarters Remission Committee in Ottawa, that will make further recommendations. A formal decision on recommending a taxpayer's application for a tax remission order is then made by the Assistant Commissioner for Legislative Policy and Regulatory Affairs Branch of the Canada Revenue Agency (CRA). If the Assistant Commissioner's decision is positive, his or her decision is then forwarded to the Commissioner for Legislative Policy and Regulatory Affairs Branch of the CRA. If the Commissioner's decision is positive, the application for a tax remission order is then forwarded to the Minister of National Revenue for further recommendation. Thereafter, the application for a tax remission order is recommended to the Governor in Council, who is responsible for making the final decision.
Application for Tax Remission Order - The Guidelines
An application for a tax remission order should include a holistic view of the taxpayer's circumstances and outline why payment of taxes and or enforcement of penalties (including interest) is unreasonable, unjust or contrary to public interest, given the taxpayer's situation. Accordingly, an application for a remission order will only be recommended to the Governor in Council where all other avenues for taxpayer relief have been exhausted, including, but not limited to, objections, appeals and taxpayer relief requests.
CRA developed the following guidelines for decision makers to apply in determining whether (or not) to recommend a remission order request in any given case:
- Extreme hardship;
- Financial setback coupled with extenuating factors;
- Unintended result of the legislation; and,
- Incorrect action or advice of CRA officials.
Extreme hardship, in context of a tax remission order, is relevant to the taxpayer's income and resources and whether (or not) they are sufficient to resolve the tax liability and or enforced penalties. An application for a tax remission order must demonstrate that payments of the taxes, penalties or interest owing would cause an extreme financial hardship for the taxpayer.
Financial Setback Coupled with Extenuating Factors
A tax remission order may be recommended in circumstances where an additional tax debt would strain the taxpayer's limited access to financial resources. However, financial setback is viewed by the courts as less severe than extreme hardship. Financial setback involves determining the significance of the amount of the tax liability involved for the taxpayer. For this guideline to apply, a significant financial setback must be present as well as at least one extenuating factor. The two main extenuating factors are:
- Circumstances beyond a taxpayer's control; and,
- Taxpayer error.
Circumstances beyond a taxpayer's control may include, but are not limited to, a series of illnesses which may warrant consideration for a tax remission order. However, the fact that a taxpayer made an error that led to excess tax liability does not in itself constitute an extenuating factor. However, if there is sufficient evidence shedding light on a taxpayer error that should have been detected and corrected by CRA officials, this may constitute an extenuating factor and warrant consideration for a remission order.
In Mokrycke v AGC, the taxpayer missed the 90-day deadline to file an objection (with the CRA) in response to reassessments issued against him (by the CRA) with respect to the 2005 and 2006 taxation years. As a result, the CRA issued a Notification of Confirmation to the taxpayer (confirming the reassessed amounts) in respect of the 2005 and 2006 taxation years. The cover letter that accompanied the notification of confirmation indicated that if the taxpayer disagreed with CRA's decision, he could appeal to the Tax Court of Canada. However, the taxpayer also missed the 90-day deadline (from the day the CRA confirmed his tax liability) to file a notice of appeal with the Tax Court of Canada, following the reassessment of his 2005 and 2006 taxation years. The Federal Court of Canada set aside CRA's decision to deny the taxpayer's remission order request and held that the taxpayer's application for a tax remission order must be remitted back to the CRA for reconsideration.
The issue, in Mokrycke v AGC, was whether CRA's "decision to deny the taxpayer's remission request was unreasonable." In his remission request, the taxpayer argued that the reassessments (issued against him by the CRA) were inaccurate due to circumstances that were beyond his control, specifically "he has not been able to respond effectively to the concerns raised by the auditor or to contest the reassessed amounts." In particular, the taxpayer relied on tax professionals to deal with his tax affairs because he was unable to respond to the audit due to personal and professional reasons, however, "the taxpayer's first accountant was unable to respond to the audit and his second accountant failed to pursue the matter." As such, the taxpayer requested relief on the basis that he did not actually owe the taxes and penalties imposed upon him by the CRA. In this case, the Federal Court of Canada allowed the taxpayer's application and explained that it was unreasonable for the CRA to reject the remission request on the basis that the information examined during the remission review did not reveal that the CRA made any error at the audit stage, when this was the exact point in issue. The Federal Court of Canada further explained that the CRA failed to provide reasons why it rejected the taxpayer's argument "that the failure of his professional representatives to discharge their responsibilities was an extenuating circumstance." This case reminds taxpayers that tax remission orders are discretionary, which are not easily granted. Further, Mokrycke v AGC sheds light on some of challenges that a taxpayer may experience when applying for a tax remission order.
It should be noted that the above-mentioned extenuating factors are inconclusive. However, where an extenuating factor other than the above-mentioned factors is considered, such factor must be reasonable in the relevant circumstances and it must unequivocally relate to the remission order requested.
Unintended Results of The Legislation
Where a taxpayer alleges that the amount owing is created by or as a result of unintended consequences of the legislation (including but not limited to the Income Tax Act), such tax result must be unjust and contrary to the scheme of the particular provision in the relevant legislation.
Incorrect Action or Advice of CRA Officials
Where the tax and or penalties owing is created by or as a result of incorrect action or advice of CRA officials, a tax remission order may be warranted. In this context, a tax remission order may be recommended when a taxpayer is required to pay additional tax and or penalties (including interest) because CRA officials have taken an incorrect action or provided incorrect advice. To determine whether a taxpayer took the reasonable steps to address an alleged incorrect action or advice of CRA officials, that taxpayer's personal circumstances should be considered. Accordingly, a tax remission order will be considered where:
- There is no evidence of bad faith on the part of the taxpayer requesting the remission orders;
- The taxpayer could not reasonably have been expected to initiate timely actions to avoid or minimize the tax, collect and remit the tax or claim a rebate for GST/HST;
- The taxpayer requested a remission within a reasonable time period to enable CRA officials to properly investigate the matter; and,
- There is written evidence to substantiate the fact that CRA officials have taken incorrect action or provided incorrect advice to the taxpayer. In the absence of written evidence, the facts may be verified by other acceptable means.
As stated by the Federal Court of Canada in Mokrycke v AGC, if CRA officials make an error in assessing tax, the error must have been recognizable at the time of the assessment and not in light of subsequent circumstances (e.g., when a court reverses a previous decision upon which the assessment is based). When it is established that an assessment is in error, at the same time, it must also be established that the taxpayer could not reasonably have been expected to:
- File a waiver;
- File a Notice of Objection to the assessment;
- Provide new information within the required time limits; or,
- Resolve the issue through any other avenue.
Further, actions or advice by CRA officials that may have misled or discourage the taxpayer from taking timely and appropriate actions, should also be taken into consideration when deciding on a tax remission order recommendation.
Pro Tax Tips - Tax Guidance and Tax Remission Orders
A tax remission order is an extraordinary measure. It is difficult to provide exact tax guidance as to whether (or not) a tax remission order will be recommended. While the above-mentioned guidelines provide a framework within which an application for a tax remission order might be supported, these guidelines are inconclusive. For instance, a taxpayer's compliance history with the Income Tax Act and health issues might be taken into consideration in determining whether (or not) the collection of a tax debt and or enforcement of penalty in unreasonable, unjust or contrary to public interest. However, it is highly recommended that an application for a tax remission order should include at least one of the above-mentioned guidelines.
According to subsection 165(1) of the Income Tax Act and subsection 301(1.1) of the Excise Tax Act, the limitation period for filing a notice of objection to a notice of assessment or reassessment is "on or before the day that is 90 days after the day of sending the notice assessment". Taxpayers may appeal directly to the Tax Court of Canada to have the assessment vacated or varied, under subsection 169(1) of the Income Tax Act, after either (a) the CRA confirmed the assessment (or reassessment); or, (b) after 90 days from filing an objection, without waiting for the objection to be considered by the CRA.
Mokrycke v AGC sheds light on some of challenges that taxpayers may experience if they miss the deadline for filing a notice of objection with the CRA and or a notice of appeal with the Tax Court of Canada. Missing the deadline to file an objection could make subsequent filings invalid, in which case a Tax Court of Canada appeal can not be filed. However, in certain cases, missing the limitation period to file a notice of objection to an assessment (or reassessment) issued by the CRA against a taxpayer may be grounds for a tax remission order application to succeed in accordance with this decision of the federal court.
Inadequate relief from tax debt and enforced penalties (including interest) can create immense financial consequences for taxpayers. If you owe taxes to the CRA and your personal circumstances support the principle that payment of such debt would be unjust, unreasonable or contrary to public interest, or if you are out of time to file a notice of objection to an assessment (or reassessment) issued against you by the CRA, please contact our tax law office for tax guidance from one of our top Canadian tax lawyers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.