Canada: Re-Appropriating Statute-Barred Credits – The CRA Gets It Wrong Again

Last Updated: December 4 2017
Article by John Sorensen

The CRA's unfair policies concerning re-appropriating statute-barred credits were dealt another blow by the Federal Court ("FC") in Pomeroy's Masonry Limited (2017 FC 952).  The FC allowed the taxpayer's application and sent the matter back to the CRA for redetermination because the CRA failed to consider all of the relevant circumstances. 


The taxpayer did not file timely T2 tax returns for 2006 through 2010 and the CRA arbitrarily assessed tax for 2006 through 2008 pursuant to ss. 152(7) of the Income Tax Act (Canada) ("ITA").  The assessed tax was collected by way of payments by the taxpayer and garnishments.  In 2011, the taxpayer hired an accountant and filed the previously unfiled returns, resulting in credits for 2006 through 2008.  Unfortunately, the refund of those credits was barred by ITA ss. 164(1) because the T2 returns were filed more than three years late.  In the meantime, the CRA further reassessed the taxpayer for GST/HST, creating a tax debt.  The taxpayer requested that the CRA exercise its discretion under ITA s. 221.2 to re-appropriate the corporate income tax credit balance to pay the GST/HST debt.  A partial re-appropriation was allowed because of a CRA mistake (source deduction remittances were misapplied to the corporate tax account).  However, the CRA refused to re-appropriate the remaining balance to the GST/HST debt and denied the taxpayer's second re-appropriation request, leading to the FC application.

The CRA officer who reviewed the initial re-appropriation request recommended denial because there had been no "extraordinary circumstances" and it appeared that the "Headquarters review" was nothing more than a rubber stamp with no substantive consideration of the issues.  The second re-appropriation request was reviewed by a different CRA officer, but denied because the CRA did not agree that the circumstances excused the late filing and because the taxpayer did not take remedial measures within a reasonable timeframe.

FC Analysis and Decision

The taxpayer correctly argued that ITA s. 221.2 does not require consideration of the circumstances leading to a failure to file and certainly does not make that an exclusive factor in the exercise of the CRA's discretion.  The taxpayer also correctly argued that the requirement to demonstrate "extraordinary circumstances" is inconsistent with the purpose of ITA s. 221.2, which is to provide flexibility and ensure the payment of tax in a manner that ensures that a taxpayer's debts will be fully resolved.

The FC held that while the circumstances of a failure to file may be considered, they are not the only considerations the CRA may take into account.  Further relevant considerations include the solvency of the taxpayer and the need to resolve tax liabilities.  The record before the FC showed no consideration or weighting of all of the information put before the CRA decision makers, despite the fact that the CRA's guidelines expressly state that a taxpayer's circumstances must be fully considered and each case must be decided on its own merits.  Therefore, the CRA's denial was unreasonable and the request was sent back to the CRA for redetermination.

Need for Reform

Pomeroy is a further welcome decision following the FC decision earlier this year in Cybernius Medical Ltd. (2017 FC 226), where the FC held the CRA's decision to refuse re-appropriation was unreasonable and counter to the purposes of the ITA.  Cases such as Pomeroy and Cybernius, along with personal experiences of tax advisors trying to resolve these issues, provide a basis upon which to criticize the CRA's approach to re-appropriation as fundamentally misguided and extraordinarily rigid.  The ostensible policy reason for the enactment of s. 221.2 was to save businesses money and improve their cash-flow management by allowing greater flexibility in transferring funds between their tax accounts, including where they may have paid more than required on one of their program accounts (see Revenue Canada Press Release, June 15, 1992 "Improved Cash-Flow Flexibility for Business").   The revenue authority touted benefits including responsiveness to the needs of business, improved cash flow management, removing unnecessary rules and regulations and saving time and money.  The CRA's draconian approach seen in recent years, however, defeats these policies.

Moreover, the ITA already includes provisions that penalize late-filers, including ss. 162(1), which is limited to a maximum of 17% of unpaid tax, and ss. 162(2), which is limited to a maximum of 50% of unpaid tax.  The punitive effect of statute-barred credits under ITA ss. 164(1) is theoretically unbounded and, in typical cases, vastly worse than the CRA deploying the ITA's late-filing penalty regime.

In Chalifoux (91 DTC 943), the Tax Court of Canada decried ITA ss. 164(1) as abusive, described its operation as deplorable and stated that it should be removed from the ITA.  Subsequently, ITA s. 221.2 was enacted.  Regrettably, the CRA implemented a set of criteria for re-appropriating tax credits that are typically impossible to meet and the CRA often applies those limited, impossible criteria without adequately considering the taxpayer's circumstances.  The CRA's at times unconscionable refusal to allow taxpayers to access their own property (namely, tax credits) and apply those tax credits to their other tax accounts perpetuates negative outcomes the Courts have repeatedly denounced.  Few (if any) areas in the administration and enforcement of taxation cry out for reform more than the statute-barred refund and re-appropriation regime.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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