Canada: The Canada Revenue Agency's Take On Taxpayer Relief For Penalties And Interest Since Bozzer—A Canadian Tax Lawyer's Analysis

Last Updated: November 8 2017
Article by David Rotfleisch

A taxpayer-relief application (TPR or fairness application) remains a viable option for taxpayers with tax debts consisting of large interest or penalty amounts.

On August 18, 2017, the Canada Revenue Agency released its Information Circular IC07-1R1 setting out the CRA's position on the taxpayer-relief provisions. In particular, the Circular explains the CRA's treatment of Income Tax Act subsection 220(3.1), which allows the Minister of National Revenue to waive a taxpayer's interest or penalty. Notably, the subsection requires that taxpayers apply for relief within a 10-year limitation period.

The new Circular accommodates the Federal Court of Appeal's decision in Bozzer v Canada (2011 FCA 186). In Bozzer, the Federal Court of Appeal held that subsection 220(3.1) allows CRA to waive accrued interest within the 10-year period despite the fact that the underlying tax debt stems from a tax year beyond that period. Prior to Bozzer, the Canada Revenue Agency refused to waive interest if it related to a tax year more than 10 years prior.

CRA's Discretion to Waive Penalties and Interest: Subsection 220(3.1)& IC07-1R1

Income Tax Act subsection 220(3.1) provides the Canada Revenue Agency with discretion to waive a taxpayer's interest or penalty otherwise payable either at will or on the taxpayer's request. But the Canada Revenue Agency cannot waive an amount that arose more than 10 calendar years ago. Beyond this, the Income Tax Act says no more on the requirements for relief under subsection 220(3.1).

The CRA's Information Circular IC07-1R1 fills in the gaps. In other words, while it is not law, the Circular informs taxpayers—and Canada Revenue Agency officials—about when the Minister is prepared to offer relief.

The Circular identifies three situations that warrant taxpayer relief:

  • Extraordinary circumstances, such as a natural disaster, a postal strike, a serious illness, or a death in the immediate family;
  • Actions of the CRA, such as processing delays or errors in the CRA's published material; and
  • Inability to pay or financial hardship, such as when payment of the accumulated interest would cause a prolonged inability to provide basic necessities.

Yet the Circular goes out of its way to clarify that these three situations are not exhaustive:

The guidelines in this part of the information circular are not binding in law. They do not give the [Canada Revenue Agency] the authority to deny a request and exclude it from proper consideration simply because the taxpayer's circumstances do not meet a guideline described in... this information circular. The [Canada Revenue Agency] may also grant relief even if a taxpayer's circumstances do not fall within the [three categories above] [para 24].

Despite these comments, however, in practice, the CRA rarely grants a taxpayer's relief request in circumstances falling outside the confines of the three situations noted above.

The Federal Court of Appeal's Interpretation of Subsection 220(3.1): Bozzer v Canada

In Bozzer, the Federal Court of Appeal considered the 10-year limitation period set out in subsection 220(3.1).

Mr. Bozzer had tax debts stemming from his 1989 tax year. Over 15 years later, he applied for taxpayer relief. In particular, in his taxpayer-relief application, Mr. Bozzer asked the Minister to waive the interest that had accrued over the last ten years. The Minister of National Revenue denied Mr. Bozzer's application.

The disagreement turned on the proper interpretation of the subsection 220(3.1)—in particular, the words "interest payable in respect of a taxation year." The Minister reasoned that relief was not available because the underlying tax debt arose from a tax year beyond the 10-year limitation period:

The Minister submits that " respect of [a] taxation year" means any interest accrued on a tax debt that arose in that taxation year. Therefore, the Minister may exercise his discretion to waive interest otherwise payable under the Act only if a taxpayer applies within ten calendar years of the end of the taxation year in which the underlying tax debt arose [para 14].

Bozzer countered that the tax year giving rise to the interest was irrelevant; the interest itself arose within ten years:

Mr. Bozzer submits that " respect of [a] taxation year" means any interest accrued in that taxation year on a tax debt. On his view of the matter, subsection 220(3.1) permits the Minister to exercise his discretion to cancel interest accrued in any taxation year ending within ten years before the taxpayer's application for relief, regardless of when the underlying tax debt arose [para 12].

The Federal Court of Appeal ultimately agreed with Mr. Bozzer. The court reasoned that the purpose of subsection 220(3.1) was to allow the Minister to waive interest or penalties in cases where a taxpayer could not timely file a tax return due to factors beyond that taxpayer's control. Yet Minister's interpretation would lead to unfair results in cases where serious illness or injury precluded a taxpayer from filing on time. The court leaned on the following example:

[I]n January of taxation year X+1, just before preparing the income tax return for taxation year X, the taxpayer is seriously injured in a car accident. In taxation year X+11 – after going through a coma, enduring many operations, recovering slowly, dealing with physical and mental challenges, and going through years of rehabilitation and retraining – the taxpayer finally gets around to filing his tax return for taxation year X.

In taxation year X+12, the Minister assesses the tax payable for taxation year X, with accrued interest, including interest on the unpaid instalments for taxation year X. Again, the taxpayer decides to apply for a cancellation of the interest accrued on the unpaid instalments for taxation year X.

On the Minister's interpretation of subsection 220(3.1), the taxpayer would be barred from asking for any waiver of interest. The tax debt on which interest accrued was eleven years ago, past the ten year limitation period.

On Mr. Bozzer's interpretation of subsection 220(3.1), the taxpayer could apply for a waiver of interest that accrued during the ten taxation years preceding his application [paras 32-5].

In response to the Bozzer decision, the CRA revised its Information Circular concerning the taxpayer-relief provisions. The previous Information Circular IC01-7 applied the limitation period per the Minister's proposal in Bozzer. The current Information Circular IC07-1R1 adopts the Bozzer interpretation.

Tax Tips – Taxpayer Relief Applications

Success with taxpayer relief (TPR) does not come easy. The Canada Revenue Agency is notoriously stingy when it comes to granting these fairness applications. Simple pleas for tax relief rarely succeed. A successful taxpayer relief application requires both a carefully crafted narrative and—as Bozzer demonstrates—legal tax savvy.

The information is thought to be current to date of posting. Income tax law changes frequently and content may no longer reflect the current state of the law. This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

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