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Taxpayer Relief and the Limits of CRA's Discretion
Subsection 220(3.1) of the Income Tax Act authorizes CRA to waive or cancel interest and penalties when fairness requires. The CRA applies this provision through its taxpayer relief program in accordance with Information Circular IC07-1R1, Taxpayer Relief Provisions (August 18, 2017). CRA's guidance identifies three main circumstances where relief may be considered: (1) extraordinary events such as natural disasters or serious illness, (2) actions of CRA, such as undue delays or errors, and (3) inability to pay or financial hardship. Disputes arise when taxpayers argue that interest charges are unfair, but the CRA maintains that statutory obligations must be enforced.
Canadian courts have recognized that this discretion must be exercised reasonably and in accordance with the evidence before CRA. While taxpayers often argue that accrued interest or penalties are unfair in their particular circumstances, CRA emphasizes that the statutory obligations under the Income Tax Act remain in force. That relief is an exception to the general rule of enforcement.
The Federal Court's decision in Minion v. The King (2025 FC 1461) illustrates how courts review the boundaries of that discretion.
A U.S. citizen residing in British Columbia, who was subject to Canadian instalment obligations while also paying U.S. tax through payroll withholdings, sought relief from instalment and arrears interest for 2021 and 2022. The CRA denied her request on two grounds: she had withdrawn financial hardship as a basis, and she could have asked her United States employer to reduce U.S. withholdings.
The Federal Court concluded that the second reason lacked any factual foundation, rendering the CRA's decision unreasonable and requiring the matter to be reconsidered. This case underscores the importance of evidentiary support in taxpayer relief decision-making. It serves as a reminder that any relief application should be prepared in consultation with an expert Canadian tax lawyer to ensure it is advanced adequately before the CRA.
Request for Relief from Instalment and Arrears Interest
Nicole Minion, a U.S. citizen living in British Columbia, worked remotely for a U.S. company. As a Canadian tax resident, she was required to pay Canadian income tax. Because her net tax owing for 2018, 2019, and 2020 exceeded $3,000, the Income Tax Act required her to make quarterly instalment payments in 2021 and 2022.
For 2021, the CRA advised her to pay four instalments: two of $3,608 and two of $4,265. For 2022, she was required to pay two instalments of $3,937 and two of $3,806. She did not make these payments. For 2021, she paid $488.28 in instalment interest. For 2022, she paid $527.71 in instalment interest and $302.66 in arrears interest.
During the same period, her U.S. employer withheld tax from her income and remitted it to U.S. authorities. Ms. Minion claimed foreign tax credits in Canada of $16,030.26 for 2021 and $11,945.47 for 2022.
Ms. Minion requested relief under subsection 220(3.1) of the Income Tax Act from the instalment and arrears interest. The CRA denied her initial application. She then pursued a second-level review, which was also refused in March 2024. At that point, both of her requests for relief had been rejected. This case illustrates why any taxpayer considering a relief application should prepare it in consultation with a top Canadian tax lawyer to ensure the strongest possible presentation before the CRA.
CRA's Denial of Taxpayer Relief under Subsection 220(3.1) of the Income Tax Act
In its decision letter on the second-level review, the CRA concluded that Ms. Minion had not demonstrated that she was prevented from making the required installment payments on time. CRA gave two reasons for this conclusion: (1) she withdrew financial hardship as a ground to justify relief; and (2) she was able to request that her employer reduce the amount withheld from her pay.
After the CRA refused both requests for relief, Ms. Minion applied to the Federal Court for judicial review of the second-level decision, asking that it be set aside as unreasonable. CRA argued that subsection 220(3.1) of the Income Tax Act grants the Minister broad discretion to waive or cancel penalties and interest, exercised in accordance with Information Circular IC07-1R1.
The CRA further submitted that it must consider the unique circumstances of each applicant, and that relief may be granted in cases of extraordinary events, financial hardship, or delays attributable to the CRA.
The Standard of Review: Reasonableness under Vavilov
The Federal Court reviewed CRA's second-level decision under the standard of reasonableness, as set out by the Supreme Court of Canada in Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65. Under this framework, the Court does not substitute its own view of the merits. Instead, it evaluates whether the administrative decision is transparent, intelligible, and justified in light of the facts and law before the decision-maker.
The Court emphasized that reasonableness review is a deferential and disciplined review. The reviewing court must read the reasons holistically and in context with the record that was before CRA. A reasonable decision is based on an internally coherent and rational chain of analysis and is justified in relation to the facts and law that constrained CRA's discretion.
A reviewing court may intervene if it loses confidence in the decision because it is untenable in light of the relevant factual constraints. Intervention is also justified if CRA fundamentally misapprehended the evidence, failed to account for critical evidence that runs counter to a material conclusion, ignored evidence, or if there is no evidence to support a finding rationally.
Challenging CRA's Decisions through Judicial Review
Applying the reasonableness standard from Vavilov, the Court assessed whether CRA's second-level decision was justified in light of the record. The Court found that one of the two reasons given by CRA—that Ms. Minion could have asked her employer to reduce U.S. withholdings—had no foundation in the evidence. Thus, the CRA could not identify any support for this point in the certified record.
Because the decision relied on both reasons together, the absence of a factual basis for one of them rendered the overall conclusion unreasonable. As a result, the Court set aside the second-level decision and ordered that another CRA reviewer reconsider the application. The Court did not make findings on whether financial hardship had been established or on the parties' submissions regarding double taxation, noting that these matters fell outside the scope of judicial review.
The Court granted the application, set aside CRA's second-level decision, and directed that a different CRA reviewer reconsider the request. In that new review, Ms. Minion must be allowed to clarify the factual and legal grounds for her application, ensuring that both she and CRA are clear on the basis for the relief being sought before a fresh determination is made.
Pro Tax Tips – Practical Guidance for Taxpayer Relief Applications
- Be Precise About Your Grounds: When applying under subsection 220(3.1), clearly identify whether your request is based on extraordinary circumstances, financial hardship, or delays caused by CRA. Vague or shifting grounds weaken the application. A top Canadian tax lawyer can help frame the request effectively.
- Support Your Request with Evidence: Relief applications are decided on the written record. Provide supporting documents such as proof of medical issues, financial records showing inability to pay, or correspondence with CRA that demonstrates delay.
- Judicial Review Is Available: CRA decisions are not immune from oversight. Where a decision lacks evidentiary support or rests on an error, taxpayers may seek judicial review before the Federal Court.
FAQs on Taxpayer Relief under Subsection 220(3.1)
What is taxpayer relief under subsection 220(3.1) of the Income Tax Act?
It is a discretionary power that allows the Minister, through CRA, to cancel or waive penalties and interest when fairness requires, typically in cases of extraordinary events, financial hardship, or delays caused by CRA.
If CRA denies my taxpayer relief application, can I appeal?
You cannot appeal to the Tax Court of Canada, but you may seek judicial review in the Federal Court. The Court will not re-decide the merits but will determine whether CRA's decision was reasonable.
Do I need a lawyer to file a taxpayer relief application?
Although it is not mandatory, given the discretionary nature of these applications and the importance of presenting strong evidence, consulting an expert Canadian tax lawyer significantly improves the chances of success.
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.
