Taxpayer Interest And Penalty Relief: How Can A Taxpayer Get Some Relief?

Canadian taxpayers are entitled to apply to the Canada Revenue Agency for taxpayer relief of penalties and interest.  All that is required is for a taxpayer who has been assessed to complete and submit an RC4288 form "Request for Taxpayer Relief - Cancel or Waive Penalties and Interest".  This form can be used for goods and services tax ("GST") and harmonized sales tax ("HST") relief in addition to income tax.

The form is relatively simple - however, the devil is in the details.  Section 2 is very important and any taxpayer seeking a significant amount of relief should take care in writing the reasons for the request for relief.  We often prepare a separate document providing the facts and reasons why relief should be granted - we do not limit the written communication to the form.  We also attach relevant documents to show transparency and openness.

It is important to understand that relief is not guaranteed.  While the CRA has broad discretion to grant relief, they also have broad discretion to deny relief. The CRA provides limited information about when they will grant penalty and interest relief.  The CRA indicates that the Minister of National Revenue may grant relief from penalty or interest when the following types of situations prevent a taxpayer from meeting their tax obligations:

  • extraordinary circumstances:  Penalties or interest may be cancelled or waived in whole or in part when they result from circumstances beyond a taxpayer's control. Extraordinary circumstances that may have prevented a taxpayer from making a payment when due, filing a return on time, or otherwise complying with a tax obligation include, but are not limited to, the following examples:
    • natural or human-made disasters, such as a flood or fire;
    • civil disturbances or disruptions in services, such as a postal strike;
    • serious illness or accident; and
    • serious emotional or mental distress, such as death in the immediate family;
  • actions of the Canada Revenue Agency (CRA): The CRA may also cancel or waive penalties or interest when they result primarily from CRA actions, including:
    • processing delays that result in taxpayers not being informed, within a reasonable time, that an amount was owing;
    • errors in CRA material which led a taxpayer to file a return or make a payment based on incorrect information;
    • incorrect information provided to a taxpayer by the CRA;
    • errors in processing;
    • delays in providing information, resulting in taxpayers not being able to meet their tax obligations in a timely manner; and
    • undue delays in resolving an objection or an appeal, or in completing an audit;
  • inability to pay or financial hardship:  The CRA may, in circumstances where there is a confirmed inability to pay amounts owing, consider waiving or cancelling interest in whole or in part to enable taxpayers to pay their account. For example, this could occur when:
    • a collection has been suspended because of an inability to pay caused by the loss of employment and the taxpayer is experiencing financial hardship;
    • a taxpayer is unable to conclude a payment arrangement because the interest charges represent a significant portion of the payments; or
    • payment of the accumulated interest would cause a prolonged inability to provide basic necessities (financial hardship) such as food, medical help, transportation, or shelter; consideration may be given to cancelling all or part of the total accumulated interest; and
  • other circumstances: The CRA may also grant relief if a taxpayer's circumstances do not fall within the situations described above.

The CRA is working to improve its procedures for dealing with Requests for Taxpayer Relief. When a completed form is filed with the supporting documentation, the CRA should send a letter to the requester acknowledging receipt of the Request for Taxpayer Relief.  The file should be assigned to a CRA officer and the taxpayer should receive requests for relevant documentation (unless a full set of relevant documents is provided with the Request for Taxpayer Relief).

If the taxpayer gets a decision that is not favourable - it happens often - then there is the ability to request an impartial review of the CRA officer's decision by the CRA (not the same CRA officer who rejected the request).

If the review procedure ends in a rejection of the requested relief, it is possible to seek a review by the Federal Court of Appeal by way of a judicial review.  However, judicial reviews often are an expensive legal procedure and can cost tens of thousands of dollars (even hundreds of thousands of dollars in some cases depending on the complexity of the issues). There have been judicial review applications filed and the Federal Court of Appeal has in some cases sided with the taxpayer.

I will be honest with you - the Request for Taxpayer Relief Program can be frustrating for persons seeking relief. That does not mean it is not worth the effort and one should not try. Just know that you may feel like you are still stuck in the mud while pursuing a process that may take time.

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.  We have many useful articles about tax audits under Free Information - Sales Tax, Harmonized Sales Tax (HST) and Goods and Services Tax (GST) Articles.

Voluntary Disclosures: Get Ahead of the Sales Tax Problem

If you make a voluntary disclosure of a sales tax error (giving rise to a payment), you get ahead of the problem.  You maintain an element of control.  If the Canada Revenue Agency or provincial governmental authorities (whichever is applicable) find the problem during the audit, you may have little control over the outcome.  This is why it is recommended that you make a voluntary disclosure if you find your sales tax mistakes and do not wait for the auditor to "maybe find it".

The Canada Revenue Agency and the Ontario Ministry of Revenue have developed voluntary disclosure programs that promise to not charge a gross negligence penalty (and other forms of penalty) if you voluntarily come forward to report the errors and pay the tax and interest.  In some cases, the authorities will even grant relief on a portion of the interest if the disclosure goes back many years.

For a voluntary disclosure to be accepted, it must be voluntary.  This means that the authorities have not informed the taxpayer of an upcoming audit.  If you were not on their radar and you come forward, there is a potential for financial savings.

But, that is not enough for the disclosure to be accepted.  It must be the first time this problem is identified with the tax authorities.  If you have made this type of error before and were informed about the error, the authorities will not accept the disclosure as voluntary.  They expected you to make the corrections to the sales tax recording and remittance systems after their earlier discussions with you.

Even if this is a first time issue, that is not enough for the disclosure to be accepted.  It must be complete.  You must do the work that an auditor would do.  You cannot hide some of the information or transactions.  For example, I recently worked with a non-resident client to make a voluntary disclosure of Ontario retail sales tax payable on goods imported from outside Canada for own use.  The client made an initial disclosure and payment based on Canada Customs import documentation.  Before we submitted the paperwork, we undertook a second review of the records and realized we have forgotten imports from another province.  We updated the disclosure and paid the additional tax.  We submitted to the authorities a detailed spreadsheet with each of the transactions and the back-up documentation at tabs matching the excel spreadsheet line number.  We made it easy for the government to audit and agree with our calculation.

The auditor assigned to the voluntary disclosure may conduct a desk audit or an on-site audit after the supporting documentation is provided.  If the auditor finds that the disclosure is not complete, he/she will assess the tax that you said was owing, the additional tax he/she found was owing, and then will calculate interest and penalties on the entire amount.

Many mistakes can be the subject of a voluntary disclosure; but, not all mistakes can be the subject of a voluntary disclosure.  If you collected sales tax and did not remit it, you will not be permitted to make a voluntary disclosure.  The government has a serious issue with you keeping their money.

The Canada Revenue Agency Has Released New Voluntary Disclosure Form

On June 16, 2011, the Canada Revenue Agency released a new version of its Voluntary Disclosure Program (VDP) Taxpayer Agreement form (Form RC 199E).  This form may be used to start the voluntary disclosure process for GST/HST errors (in addition to income tax and other federal tax programs). 

You must use this form to make a no names disclosure - but you have to be careful in filling out the form for the no names disclosure to be complete while holding back the taxpayer's identity.

I strongly recommend that persons concerned about how the Canada Revenue Agency will respond to the voluntary disclosure (e.g., the problem goes back many years and could amount to a lot of money) should ask a tax lawyer (with whom discussions are subject to solicitor-client privilege) to help them complete the form.  Whatever you write in this form may be used against you in the Tax Court of Canada or criminal courts (if you engaged in a criminal offence).

I strongly recommend that persons who do not communicate well or who are not comfortable with their ability to clearly state the facts ask a tax lawyer to help them complete the form.  Would you like to take chances that you will miscommunicate in such an important document?  Mistakes/miscommunications in the completion of this form and resulting misunderstandings may be very costly.

In addition, a lawyer can help you negotiate with the Canada Revenue Agency the parameters of a voluntary disclosure after making a no names disclosure.  A negotiation will be dependent on the facts and, most importantly, if the disclosure is considered to be voluntary.

The benefit of making a voluntary disclosure is that the Canada Revenue Agency will not impose penalties and will merely require the payment of tax and interest.  If the mistake translates into a large payment of tax over a number of years, the penalties savings can exceed the amount of the lawyer's legal fees.  In many cases, having a lawyer act as your Sherpa may be a wise business decision or, if personal finances are at stake, a stress minimization technique.

A Taxpayer May Have Grounds to Judicially Review A Denial of Access to Voluntary Disclosure Relief

The Canada Revenue Agency (CRA) offers a voluntary disclosure program that allows taxpayers to come forward and admit mistakes and pay outstanding GST/HST owing.  If the disclosure meets the requirements of the voluntary disclosure program, the taxpayer will not have to pay the penalty (the CRA waives the penalty).

Often, the CRA takes the position that a disclosure is not voluntary because the taxpayer was going to be audited (you cannot come forward after the auditor calls and says he/she is coming to conduct an audit).  At this point in time, the taxpayer knows that their mistakes will be found.

In a recent judicial review in an income tax case, the Federal Court did not agree with the CRA's characterization that a particular disclosure was not voluntary.  In Amour International Mines d'Or Ltee v. the Attorney General of Canada, the Federal Court determined that the Minister's failure to exercise his/her discretion to treat a disclosure as voluntary was not reasonable.  The Minister had relied on an internal CRA memo that indicated that the taxpayer would be audited (in circumstances where the taxpayer would not be aware of the memo).  The Federal Court also did not believe that a request for information sent to the taxpayer by the CRA PRIOR TO THE DISCLOSURE would not preclude the particular disclosure from being voluntary in nature.

The Federal Court granted the judicial review, but could not say the disclosure was voluntary and could not order the CRA to refund the penalties collected.  The judge did write that "I will, however, state that the decision was based on an erroneous finding of fact, made in a perverse or capricious manner or without regard for the material before the decision-maker."  Hint, hint, refund the penalty - please.

The morale of this story is that where enough money is at stake and the CRA refuses to treat a disclosure as voluntary, a judicial review may be an option.  A judicial review can cost over $100,000 if counsel for the CRA/Attorney General brings procedural and jurisdictional motions and if there is are problems relating to the release of relevant documents by the CRA.  It is not an option if only a small amount is at stake unless you want to fight for the principle of taxpayer fairness.