Taxpayer Relief (Fairness Application): Reduce or Eliminate Interest and Penalties
Dealing with tax debt, penalties or interest can be overwhelming, particularly where unexpected events or circumstances beyond your control have made it next to impossible to meet your obligations. The Canada Revenue Agency recognizes this, which is why the taxpayer relief provisions exist. They give individuals and businesses an opportunity to seek relief in defined circumstances.
What Taxpayer Relief Can and Cannot Do
This is the point to be clear about before anything else, because it is the most common and most costly misunderstanding in this area.
Subsection 220(3.1) of the Income Tax Act permits the CRA to waive or cancel all or any portion of any penalty or interest otherwise payable. Penalty or interest. It does not permit the CRA to cancel the underlying tax itself, and it does not permit the CRA to cancel a benefit overpayment such as CERB or the Canada Child Benefit.
A taxpayer can succeed completely on a taxpayer relief application and still owe every dollar of the principal, having gained only the removal of the interest running on it. Applications are filed on the wrong footing constantly, and the taxpayer then concludes, reasonably but wrongly, that nothing further can be done.
If the principal itself has to be cancelled, that is a different process. The only mechanism capable of extinguishing the underlying debt is a tax remission order under subsection 23(2) of the Financial Administration Act, which is a decision of the Governor in Council and is granted rarely.
There are two related powers worth noting. Subsection 153(1.1) of the Income Tax Act permits the CRA to reduce the amount of employee source deduction remittances where payment would cause undue hardship to the employer. The taxpayer relief provisions also allow the CRA to accept late, amended or revoked elections, and to issue refunds beyond the normal three-year period for individuals and testamentary trusts.
“Taxpayer relief is the most misunderstood remedy in Canadian tax. It removes the penalties and the interest. It does not touch the tax. Where the debt itself has to go, you are looking at a remission order, and almost nobody tells taxpayers that.”
David J. Rotfleisch, Certified Specialist in Taxation Law (Law Society of Ontario)
What the Taxpayer Relief Application Is
A taxpayer relief application is a formal request to the CRA for relief from penalties and interest in defined circumstances. It gives individuals and businesses an opportunity to explain their circumstances and ask the CRA to exercise its discretion.
The request is made on Form RC4288, Request for Taxpayer Relief, Cancel or Waive Penalties or Interest. It can now be submitted electronically through My Account, My Business Account or Represent a Client, as well as by mail.
The process can produce meaningful financial relief, but it requires a working understanding of the CRA’s guidelines and strong supporting documentation. Work with our tax law firm in Toronto to improve your prospects, because the outcome turns almost entirely on how the circumstances are framed against the CRA’s published criteria.
The Ten Year Limitation Period
The taxpayer relief provisions carry a ten calendar year limit, running from the end of the relevant taxation year. The limit is real and it is finite, and it should be diarized rather than assumed.
How the period is computed was settled in Bozzer v. Canada, 2011 FCA 186. The Federal Court of Appeal rejected the CRA’s restrictive reading and held that the CRA may waive interest that accrued during the ten years preceding the application, even where the underlying tax debt arose long before that period. The CRA revised Information Circular IC07-1R1 to adopt that interpretation.
The practical consequence is significant. An old tax debt does not by itself bar interest relief, however old it is. It does bar penalty relief once the year in which the penalty arose falls outside the window.
Common Grounds for Taxpayer Relief
In limited circumstances, the CRA will cancel or reduce the interest or penalties it has charged. A taxpayer relief application can be made where circumstances beyond your control resulted in the penalties and interest. The CRA’s administrative guidelines in Information Circular IC07-1R1 set out the situations in which relief may be granted:
- Extraordinary circumstances, such as a natural disaster, a serious illness or accident, or a death in the immediate family
- Actions of the CRA itself, including errors, misleading information, processing delays or unreasonable delays in resolving an objection or a tax audit
- Inability to pay or financial hardship, where paying the penalties or interest would prevent you from meeting basic living expenses
- Other circumstances, since the CRA may consider situations that fall within the scope of the provisions but are not listed
While the courts have confirmed that financial hardship is a ground for relief, the CRA is reluctant to grant an application on that basis and requires extensive submissions.
Our Canadian tax law firm is experienced in preparing taxpayer relief applications. We prepare a detailed submission setting out the grounds for relief, specifying exactly how the facts qualify under the CRA’s policy, and providing supporting evidence such as medical reports where available.
A Taxpayer Applied for Judicial Review After a Relief Request Was Denied
Allstaff Inc. v. Canada (Attorney General), 2021 FC 52, concerned a temporary employment agency. Allstaff employed its own workers and contracted them out to clients. It was required to deduct and remit employee deductions, pay its own share to the CRA, and charge and remit GST/HST on the labour supplied.
The taxpayer consistently made late payroll remittances because it prioritized its GST/HST remittances. Since its clients often did not pay until 30 to 120 days after invoicing, it argued that the CRA had erred in treating GST/HST remittances as due when the client invoice was issued.
The taxpayer also contended that the CRA had misinterpreted subsection 168(1) of the Excise Tax Act and had failed to consider subsection 152(1), which it said allowed it to collect GST/HST when payment was received rather than when invoices were issued. After the CRA denied relief under subsections 153(1.1) and 220(3.1), the taxpayer’s Canadian tax litigation lawyer applied for judicial review.
The Federal Court dismissed the application on two grounds: the Excise Tax Act provisions clearly indicated that the GST/HST payments were due on the date the invoices were issued, and the taxpayer had failed to explain why it could not restructure its business to meet both payroll and GST/HST remittance obligations on time.
The Standard of Review Is Reasonableness
The sole issue was whether the CRA’s decision to deny the second relief request was reasonable.
The review focuses on the outcome of the decision and on the reasoning process that led to it, applying Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65. The court in Allstaff confirmed that reasonableness is the standard for reviewing a discretionary decision to grant relief under the Income Tax Act, citing Building Products of Canada Corp. v. Canada (Attorney General), 2020 FC 784 and Canada Revenue Agency v. Telfer, 2009 FCA 23.
A reasonable decision is one that is justified, transparent and intelligible, and that rests on an internally coherent and rational chain of analysis justified in relation to the relevant facts and law. A party challenging a decision must establish flaws that are more than superficial or peripheral to its merits.
Employee Remittances and Undue Hardship
Subsection 153(1.1) permits the CRA to reduce the amount of employee remittances owed where payment would cause undue hardship to the employer. The court noted the CRA’s finding that the taxpayer had reported over $3 million in increased sales during the years in dispute, and that it was reasonable to expect the business to be restructured to meet its remitting obligations. There is no definition of undue hardship in the Income Tax Act, and the court applied Vavilov in holding that the ambiguity warranted deference to the CRA, which is statutorily empowered to make the decision.
The Criteria in the Information Circular
The taxpayer sought relief under subsection 220(3.1), which permits the CRA to waive or cancel all or any portion of penalty or interest otherwise payable. The CRA’s administrative guidelines in Information Circular IC07-1R1 list the situations in which relief may be granted, including extraordinary circumstances, the actions of the CRA, and inability to pay or financial hardship.
The court found it reasonable for the CRA to conclude that the taxpayer did not meet those criteria. The CRA had not misinterpreted subsection 168(1) of the Excise Tax Act, the CRA’s actions were justified by the relevant statutes, and there was insufficient evidence that compliance would cause undue hardship. The decision fell within the range of reasonableness and the application was dismissed.
Pro Tax Tips: You Must Meet the Criteria in the Information Circular
Although the Income Tax Act permits the CRA to waive or cancel penalties or interest, a taxpayer must meet the requirements set out in Information Circular IC07-1R1 to obtain relief. Framing the facts against the specific criteria, rather than describing hardship generally, is what carries an application.
What to Do If Your Application Is Denied
Request a second review.
Ask the CRA to reconsider by requesting a second-level review, which is conducted by a different CRA officer who was not involved in the first decision. Provide any additional information or documentation that strengthens your position. This step is faster and far cheaper than court, and it frequently succeeds where the first decision was made on an incomplete record.
Apply for judicial review.
If the second review does not produce a favourable outcome, you may apply to the Federal Court for judicial review. The application must generally be brought within 30 days after the decision was first communicated to you, under subsection 18.1(2) of the Federal Courts Act, subject to an extension a judge may allow. The Court assesses whether the CRA’s decision was reasonable. It does not substitute its own decision, and will ordinarily refer the matter back to the CRA for reconsideration if the original decision was unreasonable.
Consult a Canadian tax lawyer
A lawyer experienced in CRA disputes can identify why the application was refused, assemble the additional evidence needed, and conduct any further proceedings. Communications with a Canadian tax lawyer are also protected by solicitor-client privilege, while communications with an accountant are not.
Three practical considerations apply throughout.
- Timelines are strict. The 30 day judicial review deadline is short and is missed regularly. Diarize it from the moment any adverse decision arrives.
- Collection activity does not stop. Unlike an objection or an appeal to the Tax Court of Canada, filing a second-level review or a judicial review application does not automatically suspend CRA collections. Any ongoing collection action needs to be addressed separately and promptly.
- Documentation decides the outcome. Judicial review is decided on the record that was before the CRA decision maker, so evidence that was never put before the CRA will generally not be considered by the Court. Build the record at the application stage as though a judge will read it.
If you think you may qualify for relief from interest or penalties, consult one of our experienced Canadian tax lawyers to determine whether you qualify and to prepare a detailed taxpayer relief application.
Frequently Asked Questions
How do I apply for taxpayer relief?
Complete Form RC4288, Request for Taxpayer Relief, Cancel or Waive Penalties or Interest. It can be submitted electronically through My Account, My Business Account or Represent a Client, or by mail.
Can taxpayer relief cancel the tax I owe?
No. Subsection 220(3.1) of the Income Tax Act reaches penalties and interest only. It cannot cancel the underlying tax, and it cannot cancel a benefit overpayment such as CERB or the Canada Child Benefit.
What can cancel the tax itself?
A tax remission order under subsection 23(2) of the Financial Administration Act. It is a decision of the Governor in Council, it is granted rarely, and it is generally available only after objections, appeals and taxpayer relief have been exhausted.
When can I apply?
The CRA can waive penalties and interest, accept late, amended or revoked income tax elections, and issue refunds beyond the normal three year period for individuals and testamentary trusts. A ten year limit applies to these provisions, which were previously known as the fairness provisions.
How is the ten year period calculated?
For interest relief, Bozzer v. Canada, 2011 FCA 186 confirms that the CRA may waive interest accruing in the ten years before the application even where the tax debt itself is older. For penalties, the year in which the penalty arose must fall within the ten year window.
How long does a decision take?
The CRA’s service standard is to issue a taxpayer relief decision within 180 calendar days of receiving the request. Complex files can take longer.
Will filing stop CRA collections?
No. Unlike an objection or a Tax Court appeal, a taxpayer relief application does not automatically suspend collection activity. A collections hold must be requested separately.
What if my application is refused?
Request a second-level review by a different CRA officer first. If that fails, the remedy is judicial review in the Federal Court, generally within 30 days of the decision being communicated.
DISCLAIMER: This article provides broad information. It is only accurate 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 as tax advice. 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.
