Ten Year Limitation Period for CRA to Waive Penalties and Interest – Clarifications from Bozzer v. Canada (2011 FCA 186)
CRA Discretion to Waive or Cancel Penalties and Interest
Under the Canadian Income Tax Act the Canada Revenue Agency (the “CRA”) is obligated to collect any and all legitimate taxes, penalties, and interest owing from Canadian taxpayers. Generally the CRA cannot negotiate on those amounts, meaning that it cannot reduce taxes owing. This can seem harsh and unforgiving, particularly in situations where the taxpayer may not have completely been at fault. However there is an exception to this obligation in subsection 220(3.1) of the Tax Act which gives the CRA discretion to waive or cancel all or part of any interest and penalties that have accrued on a tax debt. This means that, while the CRA cannot negotiate on the base amounts of tax debt a taxpayer owes to them, they can use their discretion to waive or cancel all or part of the interest and penalties on a tax debt. Call our experienced Toronto tax firm and ask how we can help you use the Tax Act to lower your tax debt.
CRA Taxpayer Relief Program and the Voluntary Disclosures Program
But, because the Tax Act does not specify how this discretion should be used, this broad power can itself result in unfairness or inconsistency. To facilitate this, the CRA has implemented two different programs, the Taxpayer Relief Program and the Voluntary Disclosures Program. The Taxpayer Relief Program’s focus is in allowing the CRA to apply Canada’s income tax system fairly and reasonably where extenuating circumstances that were outside the taxpayer’s control gave rise to the penalties and interest. To this effect, the CRA has listed three grounds that they consider applicable for taxpayer relief: 1) extraordinary circumstances; 2) actions of the CRA; 3) financial hardship. For example, if a taxpayer cannot file their tax return on time because a fire destroyed their home that situation may qualify for tax relief as extraordinary circumstances. Where a taxpayer files a Notice of Objection and the CRA takes 7 years to confirm or vary the assessment the facts may qualify for tax relief based on actions of the CRA.
On the other hand, the Voluntary Disclosures Program (tax amnesty or VDP) is focused on encouraging Canadian taxpayers to comply with the income tax system. Taxpayers who have accidentally or deliberately incorrectly reported income or unreported income or have failed to declare offshore assets can come forward and correct their tax affairs, and in exchange, the CRA offers to waive all or part of the penalties and interest and not to prosecute for tax evasion. If you owe a tax debt which has accrued significant penalties or interests, speak to one of our top Toronto tax lawyers to see how we can help.
In Part II of this article our top Toronto tax lawyers will cover the ten year limitation period for the CRA to waive penalties and interest as well as the case, Bozzer v. Canada (2011 FCA 186) where the Court clarified how to determine the ten year period. As readers will see, the Court considered the positions of both Bozzer and the CRA, the effect each position would have as well as considered the legislative intent in drafting section 220(3.1).
Ten Year Limitation Period for CRA to Waive Penalties and Interest – Information Circulars IC00-1R5 Voluntary Disclosures Program and IC07-1 Taxpayer Relief Provisions Updated
Ten Year Limitation Period
While the Tax Act grants the CRA discretion to waive or cancel interests and penalties, the Tax Act also specifies that there is a 10 year limitation period after which the CRA is no longer able to waive or cancel interests and penalties. What was unclear was how the 10 year limitation period was determined. Specifically, in the tax case of Bozzer v. Canada, Mr. Bozzer applied for Taxpayer Relief in 2005 regarding penalties and interests from tax debts that arose in 1989 and 1990. The CRA denied his application saying that the tax debts arose in 1989 and 1990, which was more than 10 years before the date of his application for relief. As such, the CRA claimed that they had no discretion under subsection 220(3.1) of the Tax Act to waive any of the penalties or interests that Mr. Bozzer owed stemming from those tax years. Mr. Bozzer’s position was that, although the tax debt originated more than 10 years from the date of his application, interest subsequently accrued on a yearly basis. That is to say, the CRA should have discretion to waive or cancel interest that accrued within from 1995 to 2005 in Mr. Bozzer’s case.
Ultimately, the Federal Court of Appeal agreed with Mr. Bozzer’s interpretation. Specifically, the Court noted that the text of the legislation was ambiguous and could conceivably be interpreted both ways, but the Court focused on the purpose of the legislation being essentially to promote fairness and considered a hypothetical scenario. In that scenario, a taxpayer is obligated to remit taxes for a particular year, but before preparing the tax return, the taxpayer is injured in a car accident and is in a coma for a number of years. After regaining consciousness and dealing with mental and physical rehabilitation, the taxpayer is finally able to turn his mind to filing his tax return for that before mentioned year; however, 11 years have passed by this time. By the time the taxpayer is assessed, 12 years have passed – under the CRA’s interpretation, the taxpayer would be barred from any penalty or interest relief, while under Mr. Bozzer’s interpretation, the taxpayer would be able to apply for a waiver of the interest that accrued in the 10 years preceding his application. The Court found that in such a scenario, the CRA’s interpretation would lead to a harsh result that was contrary to the purposes of section 220(3.1). The Court also looked at the wording of other sections of the Tax Act where the language of the section clearly made a forward looking effect that does not exist in section 220(3.1). The implication being that had the legislature intended that section 220(3.1) was to have a look forward effect, they knew how to draft it to make that clear, but did not.
As such, the Court has clarified that the 10 year limitation period in section 220(3.1) does not disallow the CRA from exercising their discretion to waive or cancel interest that has accrued within the preceding 10 years of an application for relief, even if the base tax debt arose more than 10 years before the application. On January 13, 2017, the CRA updated their information circulars IC00-1R5 Voluntary Disclosures Program and IC07-1 Taxpayer Relief Provisions to reflect the results of this tax case. Call our experienced Toronto tax law firm and make sure everything that can be done is being done to reduce and mitigate your tax liability.