Taxpayer Relief

Taxpayer Relief (Fairness Application) – Reduce or eliminate interest and penalties

Dealing with tax debt, penalties, or interest can be overwhelming, especially when unexpected life events or circumstances beyond your control make it next to impossible to meet your obligations. The Canada Revenue Agency (CRA) recognizes that sometimes life gets in the way, which is why they implemented the Taxpayer Relief Application. It provides an opportunity for individuals and businesses to seek relief and potentially reduce their financial tax burdens under specific conditions.

If you’re facing financial hardship, extraordinary circumstances, or errors caused by the CRA, with professional support, the Taxpayer Relief Application may help relieve some of your tax debts.

What is the Taxpayer Relief Application?

The Taxpayer Relief Application is a formal request submitted to the CRA to seek relief from penalties, interest charges, or even taxes owed under specific circumstances. It’s a lifeline for taxpayers who are unable to meet their obligations due to situations beyond their control.

This application gives individuals and businesses a chance to explain their unique circumstances and request a fair reassessment. While the process can result in significant financial relief, it requires a thorough understanding of CRA guidelines and strong supporting documentation to ensure success.

Working with a tax lawyer can significantly improve the chances of your application being accepted, as we can help present your case effectively and advocate on your behalf.

Common Reasons for Taxpayer Relief Requests

In some limited circumstances, the CRA will eliminate or reduce the interest or penalties that they have charged you. A taxpayer relief application (fairness application) can be submitted when circumstances out of your control result in penalties and interest owing to the Canadian tax department.

This application is only available for situations such as:

• Medical/health problem or family member death
• Disaster (such as fire or an ice storm)
• Error on the part of the CRA
• Financial hardship

While the courts have confirmed that financial hardship is a ground for relief, CRA is reluctant to grant an application on this basis, requiring extensive submissions.

Our Canadian tax law firm is experienced in preparing Taxpayer Relief Applications for our clients. We prepare a detailed submission detailing the grounds for relief, specifying exactly how the facts qualify under the CRA policy, and provide backup evidence (such as medical reports) where available.

Contact one of our experienced Ontario tax litigation lawyers for interest and penalty relief.

Taxpayer Relief Application Eligibility Criteria

As set out in the previous section, you must meet specific criteria set by the Canada Revenue Agency (CRA) to qualify for the Taxpayer Relief Application. The CRA considers each application on a case-by-case basis. Let’s take a closer look at each of the situations that can be used to show that you meet the eligibility criteria for a successful Taxpayer Relief Application:

1. Extraordinary Circumstances.
   Events beyond your control, such as natural disasters, severe illness, or a death in the family, that impacted your ability to meet tax obligations.
2. Financial Hardship.
   If paying the penalties or interest would cause undue financial hardship, such as losing your home or inability to meet basic living expenses, the CRA may consider granting relief.
3. CRA Errors or Delays.
   Errors, misinformation, or unreasonable delays caused by the CRA that prevented you from meeting your tax obligations.
4. Inability to Pay Due to Circumstances Beyond Control.
   Situations like a business failure, unforeseen income reduction, or other hardships that make payment impossible.
5. Other Circumstances.
   The CRA may consider unique situations on a case-by-case basis if they fall within the scope of fairness.

It’s essential to provide thorough and well-documented evidence for your application to demonstrate that your situation meets one or more of these criteria. Consulting a tax lawyer can ensure your application is comprehensive and adheres to CRA standards, giving you the best chance for success.

A Taxpayer Applied for Judicial Review After Their Taxpayer Relief Request was Denied

Allstaff Inc. (the “Taxpayer”) is a temporary employment agency that employs its own workers and contracts them out to its clients. It was required to deduct and remit employee deductions, 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 late payroll remittance payments because it prioritized paying its GST/HST remittances. Since Allstaff Inc.’s clients were often not required to pay until 30 to 120 days after the invoices had been issued, it argued that the 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 was 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 a decision.

The Taxpayer Doesn’t Meet the Criteria for Taxpayer Relief Under the 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:

1. Extraordinary circumstances,
2. The actions of the CRA, and/or
3. 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 the 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.

What to Do If Your Taxpayer Relief Application Is Denied

If the CRA has denied your Taxpayer Relief Application, you have several options to consider:

1. Request a Second Review. You can ask the CRA to re-evaluate your application by requesting a second-level review. This involves having a different CRA officer, who was not involved in the initial decision, reassess your case. To initiate this process, provide any additional information or documentation that may strengthen your position.
2. Seek Judicial Review. If the second review does not result in a favourable outcome, you may apply for a judicial review of the CRA’s decision in the Federal Court. The court will assess whether the CRA’s decision was reasonable and made in accordance with the law. It’s important to note that the court typically does not substitute its own decision for that of the CRA but may send the case back to the CRA for reconsideration if it finds the original decision was unreasonable.
3. Consult a Tax Professional. Engaging a tax lawyer experienced in CRA disputes provides invaluable guidance. They help you understand the reasons for the denial, assist in gathering additional evidence, and represent you in further proceedings. Professional assistance is crucial, especially when navigating complex legal processes like judicial reviews.

Important Considerations:

• Timelines. Be mindful of the strict deadlines associated with filing for a second review or judicial review. Missing these deadlines can forfeit your right to appeal.
• Collection Activities. Unlike objections or appeals to the Tax Court of Canada, filing a second-level administrative review or a judicial review application does not automatically suspend CRA collection activities. Therefore, it’s advisable to address any ongoing collection actions promptly.
• Documentation. Ensure all relevant documents and evidence supporting your case are organized and readily available. Comprehensive documentation can significantly impact the outcome of your review or appeal.

Navigating the appeals process can be complex and time-sensitive. Taking prompt and informed action increases the likelihood of a favourable resolution.

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.

DISCLAIMER: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.