Canada: Tax Court Suggests CRA Be More Responsible In Evaluating Diligence Defences

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Tax, September 2009

The recent decision in Home Depot of Canada Inc. v. Her Majesty the Queen dealt with the common law defence of due diligence, as opposed to one of the statutory defences available to directors under subsection 323(3) of the Excise Tax Act (the ETA) or subsection 227.1(3) of the Income Tax Act. It serves to demonstrate the function of the common law due diligence defence in connection with strict liability administrative penalties and suggests that the Canada Revenue Agency (CRA) should apply commercial common sense before dismissing a taxpayer's defence of due diligence.


Home Depot was assessed late filing penalties pursuant to subsection 280(1) of the ETA. As part of its retail business in Canada, Home Depot collected and remitted GST as required by the ETA. Since 2005, it had contracted out its GST remitting and reporting obligations to Deloitte Tax LLP (Deloitte Tax), the largest North American provider of sales tax compliance services. Home Depot had remitted millions of dollars of GST each year, and with two exceptions, it made all its payments on time. Due to a clerical error, the two monthly GST returns and the accompanying remittances were not received on time by the CRA because Deloitte Tax had sent them to the wrong address. Once the errors were realized, Home Depot took immediate steps to re-file those returns and pay all outstanding amounts including interest. In respect of these errors, the CRA imposed late filing penalties in the amounts of C$77,097.76 and C$326,223.74. Home Depot appealed the late filing penalties on the basis that it exercised due diligence in attempting to meet its obligations under the ETA.


The parties agreed that Home Depot could not succeed in a due diligence defence merely because it hired a third party to perform its GST obligations, and therefore, the actions of Deloitte Tax were relevant in evaluating the due diligence claim. The Minister took the position that the due diligence defence was only available in very narrow and restrictive circumstances and was not available where a taxpayer collected GST from customers but failed to remit the correct amount by the due date. The Honourable Justice Campbell Miller rejected the Minister's position. Miller J., relied on the Federal Court of Appeal decision of Corporation de l'Ecole Polytechnique v. Canada, where the court stated "that there is no bar to the defence argument of due diligence, which a person may rely on against charges involving strict liability, being put forward in opposition to administrative penalties ... due diligence excuses either a reasonable error of fact, or the taking of reasonable precautions to comply with the [Excise Tax] Act."

The Minister then took the position that "in considering the question of what reasonable precautions were taken, the issue must be narrowed to ask [whether] reasonable precautions [were] taken to ensure the remittance was mailed or delivered to the correct address." Miller J., took a broader approach to addressing whether Deloitte Tax, as agent for Home Depot, took reasonable precautions to properly remit GST in accordance with section 280 of the ETA. Specifically, Miller J., decided that Deloitte Tax's overall compliance system should be reviewed and not just the specific precautions in place to make sure that remittances were properly addressed and mailed. In assessing the overall system, Miller J., found Deloitte Tax to be "a well-oiled sales tax remitting machine". The failure to properly deliver the November and January remittances was due to simple human error.

Miller J., noted that it is easy to be critical of behaviour after an error has been committed and that one can always find something else a taxpayer might have done. Miller J., stated however, "that is not the test. The test is whether what the taxpayer in fact did was sufficient reasonable precaution – not that the taxpayer did not hold the hand of the employee throughout every single task no matter how menial."

Finding in favour of Home Depot, Miller J., concluded that even if there were some safeguards missing at the mailing stage of the system, taken cumulatively, they would not outweigh the overall care and attention of Deloitte Tax in fulfilling its obligation to Home Depot to file returns and remittances on a timely basis.


The most interesting part of this case is the obiter dictum (the observation of the court which does not form part of the official reasons for the decision in the case). Miller J., was of the view that the case should never have gone to trial. He acknowledged that the penalty under subsection 280(1) of the ETA applies automatically when GST is remitted late. However, he went on to state that "a step back for a balanced look by a CRA official exercising a good dose of commercial common sense should not have resulted in [a] relentless pursuit of a half-million dollar penalty." He made this statement after noting Home Depot's history and the positive efforts it made to comply with its GST obligations. These comments provide a clear statement to CRA that it should be more reasonable in its application of administrative penalties where otherwise diligent and compliant taxpayers happen to make the occasional innocent mistake.


This case comes on the heels of two other recent Tax Court of Canada cases which were decided under the informal procedure process. These cases found that the automatic penalties which applied, under section 163 of the Income Tax Act, could be avoided where the taxpayer exercised due diligence.

While, historically, the CRA has taken the position that penalties should be applied automatically and it is up to the taxpayer to apply under the taxpayer relief (fairness) provisions for a waiver or cancellation of the penalties, the taxpayer relief provisions do not specifically allow for the defence of due diligence and therefore, they may not be applied on that basis.

The interesting question for the future will be to see whether such positive statements by the courts will be enough to cause CRA to accept due diligence defences (where the taxpayer relief provisions might not apply) before proceeding through litigation.

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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