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
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
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version of GST/HST Memorandum 16.3.1) was no longer applicable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.
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
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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