For taxpayers faced with incorrect tax assessments or large balances owing that consist predominately of penalties and interest, the Income Tax Act contains provisions that provide taxpayers with the means to potentially resolve either issue. However, in many cases the Canadian Tax Act either does not allow for adequate relief, or the strict application of its terms leads to an unjust result. In cases where all other avenues in the Income Tax Act have been exhausted, including where time periods for tax appeals have expired, subsection 23(2) of the Financial Administration Act gives the Canadian government the authority to forgive a tax debt of a taxpayer in circumstances where the collection of the tax is unreasonable, unjust or where it would not be in the public interest to do so.
Tax Remission Application to CRA– The Process
Taxpayer requests for the remission of taxes, penalties and interest owing is a long, drawn-out administrative process. A taxpayer must first write to the director of his or her Tax Service Office requesting remission. The director, on the advice of subordinates, will recommend for or against tax remission. The request for tax remission is then forwarded to the Headquarters Remission Committee in Ottawa, which makes a further recommendation. A formal decision on recommending tax remission is then made by the Assistant Commissioner for legislative policy and Regulatory Affairs.If that decision is positive, the decision goes to the Commissioner for Legislative Policy and Regulatory Affairs, then to the Minister of National Revenue and then to the federal Cabinet, which makes the final decision.
CRA Tax Remission Guidelines
Unlike Notices of Objection and Appeals to the Tax Court of Canada, an application for tax remission has littleor nothing to do with whether or not the underlying assessment of tax is correct. Instead, the application involves putting forth a taxpayer's "story" in the best light and arguing why the payment of the tax would be unjust given the circumstances. CRA has developed internal guidelines that identity the following factors as situations in which tax remission may be considered:
- Payment of amounts owing would cause extreme hardship
- Financial setback coupled with extenuating factors;
- Amount owing is an unintended result of the legislation; and
- Amount owing is the result of incorrect action or advice by CRA officials;
Convincing CRA to recommend in favour of tax remission is an extremely high bar and this theme informs each of the above-noted factors. A strong application for remission is one that incorporates at least one of these factors.
Extreme hardship in the context of a remission order is concerned with the income and resources of the taxpayer and whether or not they are sufficient to resolve the tax debt. The Remission Guide suggests that CRA will consider an application under extreme hardship when the taxpayer's income falls below the low income cut-offs for his or her demographic, as established by Statistics Canada. The extreme hardship should exist at the time of the application and normally will have existed when the original tax debt arose. Arguments by a taxpayer that are based solely on the size of the tax debt, without being "tied" to his or her own significant lack of resources, will likely not be given much consideration.
Financial Setback Coupled with Extenuating Factors
Financial setback requires something less severe than extreme hardship, but must also be coupled with an extenuating circumstance, of which the main examples given by CRA in the Remission Guide are circumstances beyond a person's control and taxpayer error. A circumstance outside of a taxpayer's control is typically required to be something specific to that taxpayer, such as a serious illness. Arguments of a more general nature, such as those centered around the fact that the economy is sluggish, will generally not cut it. Regarding errors by a taxpayer, the Remission Guide specifically states that a misinterpretation of the legislation or bookkeeping errors will in all likelihood not justify relief. Errors which CRA should have detected and corrected, however, may justify remission if argued convincingly.
Unintended Results of the Legislation
Where a taxpayer alleges that the amount owing is an unintended consequence of the Tax Act, the tax result must be undoubtedly unfair and completely contrary to the scheme of the particular provision.
Incorrect Action or Advice by CRA
Generally, this factor requires written evidence of the incorrect CRA action or advice. The operative question is whether the alleged incorrect action or advice was clearly incorrect at the time it occurred: subsequent changes to the law will not be considered. In all cases, a taxpayer seeking remission on this basis must have always acted reasonably and in good faith in their efforts to resolve the issue.
The above-noted factors are broad enough so as to allow experienced Canadian tax lawyers to fit a given taxpayer's circumstances under one of the categories in the appropriate circumstances. Putting forth the best argument possible requires a strong understanding of the Income Tax Act and the obligations it imposes on taxpayers and CRA alike. In addition, arguing that one's tax debt is an unintended consequence of the legislation consists of pure statutory interpretation regarding the Canadian Tax Act, an area in which our team of Canadian tax lawyers has a demonstrated expertise.
Judicial Review of CRA Refusals to Recommend Remission
The Federal Court of Canada has jurisdiction to review CRA decisions that refuse to recommend tax remission, however the Federal Court has no jurisdiction over a Cabinet decision to not pass an order granting a remission. Although there is technically recourse to the Federal Court from a CRA "refusal to recommend" tax remission, to date all taxpayer Judicial Review applications of such CRA decisions have been dismissed. This underscores the importance of putting your best foot forward with the initial application for remission, since taxpayers will in all likelihood not get an opportunity to make additional submissions and the Courts have so far been unwilling to overrule a CRA decision on tax remission. Our Canadian tax lawyers are experts on the Income Tax Act and the CRA Remission Guide and will give you the best chance of success when applying to CRA for the remission of taxes, penalties and/or interest.
Conclusion– Tax Tip
If substantial taxes, interests and penalties still remain after a taxpayer has exhausted all available avenues of relief in the Income Tax Act, such a taxpayer may be a candidate for an application to CRA for tax remission of some or all of their tax debt. There are no second chances and it is imperative that any application for remission is coherent, tailored to the Remission Guide and drafted with an understanding of the Tax Act. If you have an amount owing to CRA and believe your personal circumstances support a conclusion that the payment of the tax would be unreasonable or unjust, speak with one of our leading Canadian tax lawyers to discuss the possibility of an application for a tax remission order.
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.