A taxpayer applied for judicial review after its taxpayer relief request was denied
Allstaff Inc. (the "Taxpayer") is a temporary employment agency that employed its own workers and contracted them out to its clients. It was required to deduct and remit employee deductions and pay its share of those deductions to the Canada Revenue Agency (CRA), and charge and remit GST/HST on the labour it supplied to its clients. The Taxpayer consistently submitted its payroll remittance payments late because it prioritized paying its GST/HST remittances. Since Allstaff Inc.'s's clients were often not required to pay until 30 to 120 days after the invoices had been issued, it argued that CRA had erred by asserting that GST/HST remittances were due when a client invoice was issued. The Taxpayer also contended that the CRA had misinterpreted s.168(1) of the Excise Tax Act (ETA) and had failed to consider s.152(1) of the ETA which allowed the Taxpayer to collect its GST/HST when it received its payments from its clients as opposed to when the invoices were issued. After the CRA denied the Taxpayer's request for relief from debts, interest and penalties pursuant to ss.153(1.1) and 220(3.1) of the Income Tax Act, the Taxpayer's experienced Canadian tax litigator applied for judicial review of the CRA's decision.
The Federal Court dismissed the Taxpayer's judicial review application on the basis that
- The ETA provisions clearly indicated the Taxpayer's GST/HST payments were due on the date the invoices were issued, and
- The Taxpayer failed to explain why it could not restructure its business to be able to pay both payroll and GST/HST remittances in a timely manner.
The standard of judicial review is reasonableness
The Federal Court decided the sole issue in this case is whether the CRA's decision to deny the Taxpayer's request for reconsideration of a second relief request from payments, interest and penalties was reasonable. The review should focus on the outcome of a decision, the reasoning process that led to that outcome (Canada v Vavilov, 2019 SCC 65) and stated that a reasonable decision is one that is justified, transparent and intelligible and that it must be based on an internally coherent and rational chain of analysis that is justified in relation to the relevant facts and law. The court also mentioned that a party challenging the decision must establish the decision contains flaws that are more than superficial or peripheral to its merits.
The amount of employee remittances wouldn't cause undue hardship to the Taxpayer
Subsection 153(1.1) of the Income Tax Act permits the CRA to lower the amount of employee remittances owed if such payment would cause undue hardship to the employer. However, the court found the CRA Tax Appeals Team noted that the Taxpayer reported over $3 million in increased sales during the tax years in dispute and it was reasonable to expect the Taxpayer to restructure its business operations to meet its remitting obligations. Although there is no definition of undue hardship in the Income Tax Act, the court cited the decision in Vavilov and decided that an ambiguity indicates the court should grant deference to the CRA's decision that is statutorily empowered to make such decision.
The Taxpayer doesn't meet the criteria for taxpayer relief under CRA's Information Circular
The taxpayer requested relief under subsection 220(3.1) of the Income Tax Act which permits the CRA to waive or cancel any or all portions of penalty or interest otherwise payable. The CRA has also developed administrative guidelines under the Information Circular 07-1R1 that lists the situations where the CRA may grant such relief including:
- Extraordinary circumstances,
- The actions the CRA, and/or
- The employer's inability to pay or financial hardship.
The court found it was reasonable for the CRA Appeals Team Leader to reach the conclusion that the Taxpayer did not meet these criteria. First, the CRA did not misinterpret subsection 168(1) of the ETA because GST/HST remittances were indeed due at the time of the invoice issuance. Therefore, the Taxpayer could have restructured its business to pay both payroll and GST/HST remittances in a timely manner. Second, the CRA's actions were all properly justified by the relevant statutes. Thirdly, the court agreed with the CRA that there was insufficient evidence to conclude that compliance would cause undue hardship to the Taxpayer's business.
Overall, the court found the CRA's action fell within the standard of reasonableness and rejected the judicial review application.
Pro Tax Tips - a taxpayer must meet CRA's Information Circular criteria to obtain tax relief
Although the Income Tax Act permits the CRA to waive or cancel certain or all portions of penalties or interest, a taxpayer must meet the requirements set out in the CRA's Information Circular 07-1R1 to be entitled to relief. If you think you may qualify for taxpayer relief from any debt, interest or penalty, you should consult with one of our experienced Canadian tax lawyers to help you determine whether you qualify for the taxpayer relief program and if so to submit a detailed taxpayer relief application.
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