In the recent decision Denso Manufacturing Canada Inc. v. Canada (National Revenue), 2020 FC 360, the Federal Court ruled that the Minister of National Revenue (“Minister”) had acted reasonably in exercising its discretionary right to deny a late-filed GST/HST election between two closely related Canadian corporations, Denso Manufacturing Canada, Inc. (“Denso Manufacturing”) and Denso Sales Canada, Inc. (“Denso Sales”, and collectively with Denso Manufacturing, “Denso Corporations”).
- A joint election under section 156 of the Excise Tax Act (Canada) (“ETA”) deems all taxable supplies made between closely related corporations to have been made for nil consideration so that no GST/HST is collectible on such supplies (“156 Election”).
- Ignorance of the law is not a valid excuse for the late filing of a 156 Election and, in the absence of an explanation that does not amount to negligence or carelessness, the Minister may exercise its discretion to deny such late filings.
Denso Manufacturing and Denso Sales are closely related corporations for purposes of the 156 Election. Prior to the amendments to section 156 effective January 1, 2015 (“Amendment”)1, the Denso Corporations made the election by completing Form GST25 and keeping it with their records. However, as a result of the Amendment, parties to an existing 156 Election were required to file the new prescribed Form RC4616 before January 1, 2016 for the election to continue to be in effect in 2015. The Denso Corporations failed to file Form RC4616 on time.
In January 2016, the Canada Revenue Agency (“CRA”) reviewed the Denso Corporations' GST/HST returns for the November and December 2015 periods and later informed them of their non-compliance with the new filing requirements of section 156 of the ETA.
Discussions with their tax advisors led the Denso Corporations to believe that their existing “unfiled” 156 Election already covered the 2015 period and so, on February 22, 2016, they filed a new 156 Election, using Form RC4616, with January 1, 2016 as the effective date (“New 156 Election”). As of that date, the CRA had not yet published its Policy Statement P-255 (dated July 22, 2016 and effective January 1, 2015) (“Policy”) which states that a request to late-file a 156 Election is subject to the CRA's discretion and must include a clear explanation (that does not show negligence or carelessness on the taxpayer's part) for not filing the election in a timely manner.
When the CRA later audited the Denso Corporations for the period of April 1, 2014 to March 31, 2016, the Denso Corporations realized that the New 156 Election should have been made effective January 1, 2015. In an attempt to correct the error, on November 8, 2017, the Denso Corporations sent a request letter to the CRA that included a revised Form RC4616 with an effective date of January 1, 2015. As an explanation for the late filing, the Denso Corporations suggested that had the CRA published the Policy prior to February 2016, the Denso Corporations would have filed Form RC4616 in a timely manner. In subsequent correspondence with the CRA, the Denso Corporations later argued that they had no knowledge of the Amendment and had been ill-advised by their tax counsel.
The CRA denied the request for late filing based on the determination that the Denso Corporations had failed to demonstrate that they had not been careless or negligent in failing to comply with the election requirements. In justifying its decision, the CRA stated:
It is imperative that the legislation be applied consistently to all registrants, and in the absence of a valid extraordinary circumstance, it would be unfair to registrants that did exercise care and were not negligent in their affairs to not re-assess non-compliant registrants.
Therefore, the Minister refused to amend Denso's RC4616 form to backdate the election date to January 1, 2015. GST/HST adjustments of $30,098,952.56 for Denso Manufacturing and $308,617.34 for Denso Sales, each with interest, were made by the CRA for calendar year 2015.
As stated by Justice Zinn, to determine the validity of the Denso Corporations' defense, the Court had to examine the following questions:
- Was the process afforded to the Denso Corporations procedurally fair?
- Was the discretionary decision not to accept the late-filed RC4616 reasonable?
The Denso Corporations were afforded the opportunity to make written representations to the Minister. Though the Minister did not fully disclose the documentation pertaining to its decision-making process, the Court determined that there is no disclosure requirement prior to the rendering of a decision. The Minister had provided the Denso Corporations with the information they needed to assess the CRA's concerns and the case made against them. The Court ruled that the Minister had proceeded with fairness.
Reasonableness of the decision
The Court ruled that the CRA's decision was reasonable when considering the Minister's reasoning process and the ultimate outcome. The original Form RC4616 filed in February 2016, for the 2016 period, was not even late-filed. Instead, it was a timely-filed election that was intended to be effective as of January 1, 2016. The Denso Corporations did not provide the Court with evidence to suggest that the form was intended to cover the 2015 period.
Additionally, the Denso Corporations' ignorance of the Amendment did not excuse them from late filing. Their reliance on a tax consultant's advice after the election due date had already passed did not demonstrate a reasonable effort to comply with the section 156 requirements under the ETA. The Minister had the discretion to accept or refuse the late-filed election, and as the Denso Corporations could not demonstrate that they had not been careless or negligent, the Minister adequately exercised that discretion.
- The Court reinforced the Minister's discretion with regards to accepting or refusing late-filed 156 Elections, especially in circumstances where the taxpayer had not shown that its actions were not negligent nor careless.
- The CRA does not have to provide all the documentation relating to a decision under review, but rather must provide enough documentation to inform taxpayers of the CRA's concerns and the case made against them.
- Taxpayers are required to stay up to date regarding new developments related to tax compliance obligations. Relying on a tax consultant's advice “after a well-published deadline had already passed” is not sufficient to provide evidence that a taxpayer demonstrated “a reasonable effort to comply with the ETA”. The CRA may, in its discretion, determine that ignorance of the law amounts to carelessness and negligence.
- As stated in the Policy: “[t]he discretion to accept a late-filed election or revocation does not allow registrants to intentionally avoid their legal obligations under the [ETA] but allows the CRA to consider a request to accept a late filed election or revocation on a case-by-case basis.” Unless there are valid extraordinary circumstances, a late filed 156 Election is likely to be denied by the CRA and a judicial review of such Minister's refusal could just be a merry chase.
1. See the Economic Action Plan 2014 Act, No.1, SC 2014, c 20.
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