Canada: Voluntary disclosures and the reduction of penalty and interest in wash transaction situations: the CRA updates its position

The Canada Revenue Agency (CRA) has recently published a revised version of its GST/HST Memorandum 16.3.1, entitled Reduction of Penalty and Interest in Wash Transaction Situations. This new version of the memorandum sets out the administrative guidelines for the reduction of interest where a voluntary disclosure involving a wash transaction¹ has been made. The memorandum essentially addresses the uncertainty surrounding the elimination of the 6% penalty for amounts owing after March 31, 2007. Indeed, for the last three years, many tax practitioners underlined that the tax authorities' refusal to waive interest payable on a GST/HST liability voluntary disclosed would eventually lead to the "slow but eventual death of GST voluntary disclosures"²

Before April 1st, 2007, subsection 280(1) of the Excise Tax Act (the ETA) imposed a 6% penalty (in addition to interest at the prescribed rate) where a person failed to remit or pay an amount to the Receiver General when required by the ETA. As of April 1st, 2007, the 6% penalty no longer applies. Instead, an increased interest rate is applicable to amounts owing under the ETA (i.e. a basic commercial rate, revised quarterly, plus 4 percentage points).

For periods from 1991 through March 2007, in the context of a wash transaction where certain conditions were met, the CRA considered waiving and cancelling the penalty and interest that were in excess of 4% of the tax not properly collected. The 4% was considered a penalty payable in addition to the tax assessed. In the context of a voluntary disclosure involving a wash transaction, such "4% penalty" was simply waived by the CRA.

Our understanding is that for post-March 2007 periods, the CRA representatives in charge of the voluntary disclosure program simply refused to waive the 4% balance remaining for voluntary disclosures involving a wash transaction. The CRA essentially argued that its published position at that time (i.e. the former version of GST/HST Memorandum 16.3.1) was no longer applicable considering the amendment of section 280 of the ETA and the elimination of the 6% penalty. In fact, as a voluntary disclosure has to involve the application, or potential application, of a penalty, a taxpayer was technically not allowed to seek relief through the voluntary disclosure program in such circumstances.

For post-March 2007 periods, the revised version of the memorandum now makes it clear that where a voluntary disclosure involving a wash transaction has been made: (i) the voluntary disclosure is still a valid disclosure even though there may be no penalty applicable (where other standard requirements are met); and (ii) the newly applicable interest rate will be reduced to 0% of the amount of the transaction identified as a wash transaction.

As it was the case for pre-April 2007 periods, this clarification by the CRA again constitutes a true economical incentive for registrants to resort to the voluntary disclosure program where wash transactions are involved.

Footnotes

1. According to the CRA, a "wash transaction" occurs when a supply that is taxable for GST/HST purposes is made and the supplier has not remitted an amount of net tax because, inter alia, the tax was not collected from the recipient who is a registrant, and the recipient would have been entitled to claim a full input tax credit if the tax had been correctly applied.

2. Brent F. Murray, "CRA's refusal to Waive Premium Punitive Interest: The Slow But Eventual Death of GST Voluntary Disclosures", CCH Canadian GST Monitor, Issue No. 231, December 2007; as cited in CCH Canadian GST Monitor, Issue No. 259, April 2010.

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