The CRA recently announced a new pilot project allowing CRA
appeals officers to consider applications for interest and penalty
relief concurrently with notices of objection. This
initiative may benefit both taxpayers and the CRA's
administration of tax disputes.
Previously, the CRA's policy was to hold taxpayer relief
applications in abeyance until the substantive issues raised in a
notice of objection had been considered and decided. Richard
Montroy (Deputy Assistant Commissioner, Compliance Programs Branch
of the CRA) indicated at the 2011 Canadian Tax Foundation national
conference that this policy was under review and the CRA confirmed
in November 2013 that the pilot project is now underway.
For taxpayers, the most important factor in settling a tax
dispute is the bottom line amount payable, including interest and
penalties. It militates against achieving a timely and
mutually acceptable settlement of a tax dispute when significant
accrued interest or penalty amounts remain in issue after the
substantive tax issues are resolved. While discretionary
penalties may be readily dealt with by CRA appeals officers while
considering notices of objection, in certain situations a
non-discretionary penalty and arrears interest might be partially
or fully cancelled pursuant to ss. 220(3.1) of the Income Tax
Act (Canada) ("ITA"). This could arise where
the mechanical application of fixed, formulaic penalties is not
commensurate with the impugned activity, or in situations including
taxpayer hardship, extraordinary circumstances or third-party
Allowing CRA appeals officers adjudicating substantive tax
issues under objection to concurrently grant taxpayer relief
recognizes the economic reality of taxpayers' decision-making
processes and may avoid artificially segregating the administration
of tax disputes into discrete components. This approach may
also reduce the CRA's workload, since the taxpayer relief
application would otherwise be considered separately by CRA
officers otherwise unfamiliar with the taxpayer and underlying
Certain potential procedural difficulties may arise under the
new program. For example, a taxpayer cannot file a notice of
objection to a reassessment issued pursuant to a taxpayer relief
application (ss. 165(1.2) of the ITA). Moreover, decisions on
taxpayer relief applications are challenged by application for
judicial review before the Federal Court, whereas the procedural
route for disputing the CRA's decision on a notice of objection
is by appeal to the Tax Court of Canada.
It is unclear whether separate notices of reassessment would
need to be issued – one for the substantive decision on the
notice of objection and another for the taxpayer relief
decision. It is also unclear whether penalties and interest
would be excluded from the reassessment arising from the
substantive decision, or included and then cancelled by a further
reassessment. Perhaps the CRA may require taxpayers to waive
their further appeal and application rights as part of any
negotiated settlement that includes interest or penalty relief, so
that a single, conclusive and unchallengeable notice of
reassessment can be issued.
Assuming any procedural issues are ironed out, allowing CRA
appeals officers to waive or cancel interest and penalties
concurrently with considering notices of objection is a welcome
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