Taxpayer relief provisions
When a taxpayer fails to comply with his obligations under the Income Tax Act or other taxation statutes that the Canada Revenue Agency administers, the CRA will often apply penalties such as late-filing penalty, repeated failure to report income penalty and false statement or omissions penalty. However, there are taxpayer relief provisions (formerly called fairness applications) in the Income Tax Act that give the CRA discretion to waive or cancel part or all portions of interest and penalties, accept late filed, amended or revoked income tax elections, and provide income tax refunds beyond the 3-year normal period allowed for individuals. The CRA has also developed administrative guidelines, described in Information Circular 07-1R1 that lists the situations where the CRA may grant taxpayer relief. It is important to realize that there is a 10-year limitation period in which to apply for taxpayer relief. For example, if a taxpayer wants to apply for relief for the 2011 tax year, the application must be submitted to the CRA by December 31, 2021.
The CRA will only grant a taxpayer relief under the following situations:
- Extraordinary circumstances
- This includes situations of natural or human-made disasters as well as civil disturbances or disruption of services, serious illness or accident, or significant mental or emotional distress. The current COVID-19 pandemic should normally qualify as extraordinary circumstances.
- Actions of the CRA
- This includes process delays that result in taxpayer not being informed within a reasonable time that amount was owing, error in material available to the public which led taxpayers to file returns or make payments based on incorrect information.
- Inability to pay or financial hardship
- This includes situations when collection is suspended due to the loss of employment and subsequent financial hardship, when payment of the accumulated interest would cause a prolonged inability to provide basic necessities such as food, medical care, transportation or accommodation.
s.153(1.1) of the Income Tax Act permits the CRA to the lower the employer's amount of remittance if it causes undue hardship
According to s.153(1.1), where the CRA is satisfied that the deducting or withholding of the amount of salary, wages or other remuneration paid by an employer to an employee otherwise required to be deducted or withheld under subsection 153(1) would cause undue hardship to the employer, the CRA may determine a lesser amount and that amount shall be deemed to be the amount determined under that subsection as the amount to be deducted or withheld from that payment.
The Federal Court rejected a staffing agency's s.153(1.1) argument because there was no undue hardship
A recent Federal Court case Allstaff Inc. v AGC sheds some light on this provision. In this case, Allstaff Inc., a temporary employment agency was required to deduct and remit employee deductions and pay its share of those deductions to the CRA as an employer, and charge and remit GST/HST on the labour it supplied to its clients. It had consistently submitted its payroll remittance payments late which incurred interest and penalties because it prioritized paying its GST/HST remittances. Allstaff Inc. also cited s.153(1.1) of the Income Tax Act and argued that it could not pay the employee remittances in a timely fashion because it had to prioritize paying its outstanding GST/HST payments. Therefore, the CRA's collections would constitute undue hardship and Allstaff Inc. should be allowed to lower the amount of its employee remittances.
The Federal Court reviewed the facts and decided that no financial hardship existed, therefore s.153(1.1) did not apply. The CRA's Winnipeg Team leader found Allstaff Inc. had net profits for the tax years from 2013 to 2016, positive shareholder equity after considering year-end liabilities for the 2016 year as well as consistent revenues and a consistent number of employees from 2012 to 2016. Accordingly, the CRA's Winnipeg team leader expected the taxpayer to borrow against assets or sell non-essential assets to pay its tax debts. The court confirmed the CRA's findings and found that Allstaff Inc. reported over $3 million in increased sales between taxation years 2016 and 2017 which was reasonably sufficient to restructure business operations to ensure compliance with all tax remittances.
Pro tax tips - "undue hardship" is not defined statutorily in the Income Tax Act.
According to the Federal Court, the term financial undue hardship is not statutorily defined and has not been judicially considered. Following the decision in Canada (Minister of Citizenship and Immigration) v Vavilov, 2019 SCC 65, the Federal Court mentioned this kind of ambiguity would suggest the court should give deference to the CRA which is statutorily empowered to make such a decision. However, this in turn gives the CRA an unfair advantage over a taxpayer. If you or your business is struggling to pay off your tax interest and penalties due to financial hardship, contact our tax law firm to speak with an experienced Canadian tax lawyer to determine whether you meet the undue hardship condition of the taxpayer relief provisions and advise as to what other tax saving measures you might be eligible.
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