When judicial review (Federal Court) finds that interest imposed by CBSA must be waived

Overview

David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm.

Interest assessments arising from Canada Border Services Agency (CBSA) compliance verifications can place significant financial strain on Canadian importers, particularly when GST coding or exemption errors result in reassessments involving large amounts.

The Federal Court's decision in T-1011-25 Lufthansa Technik Aktiengesellschaft v. AGC offers important guidance on how interest-relief applications must be evaluated under s. 3.3 of the Customs Act and demonstrates how judicial review can be used when CBSA fails to exercise its statutory discretion lawfully.

This decision provides important lessons for businesses and taxpayers who face interest charges even where the government suffers no revenue loss — an issue that experienced Canadian tax lawyers frequently address when advising clients.

Facts of the Lufthansa Technik Case

Technik, a global aircraft maintenance and repair entity, imported parts into Canada for installation and overhaul work. In 2024, the CBSA undertook a trade compliance verification. The verification concluded that Lufthansa had used incorrect GST exemption codes, creating a substantial unpaid GST liability. CBSA issued an interim verification report in December 2024 and later confirmed its position in a final report on March 6, 2025.

Under s. 33 and the "specified rate" identified in s. 2(1) of the Customs Act, CBSA imposed interest of approximately $3.7 million. Lufthansa did not challenge the GST reassessment itself but sought relief from interest based on the following grounds:

• The GST payable was fully recoverable through an input tax credit (ITC), so the government could not suffer any revenue loss.
• CBSA's internal "wash transactions policy" required interest relief where no revenue loss exists.
• Imposing the specified interest rate was unreasonable and unsupported by any explanation.
• Different treatment of import GST compared with domestic GST contradicted Canada's international obligations under the GATT.

Despite these submissions, CBSA denied relief. It claimed Lufthansa had not satisfied the wash-transaction criteria, that relevant CRA policies did not apply to import GST, and that using the specified rate was appropriate — though it did not explain why.

The Federal Court found these findings insufficient and unreasonable.

Legal Issues Considered by the Court

Application of the Wash-Transaction Policy

CBSA Memorandum D11-6-4 sets out a detailed wash-transaction policy designed to avoid interest assessments when errors create no net revenue loss. Lufthansa's full ITC entitlement meant revenue loss was impossible. CBSA, however, failed to analyze this core criterion. The Court held that CBSA must meaningfully assess whether revenue loss exists before denying interest relief.

Administrative-Law Requirements and Procedural Fairness

Administrative decisions must reflect transparent, intelligible, and justified reasoning. The CBSA's refusal to address Lufthansa's central argument — the complete absence of revenue loss — violated these principles. The Court found that the decision lacked the justification demanded under modern administrative-law principles.

Failure to Justify the Interest Rate

The CBSA's imposition of the "specified rate" instead of the default "prescribed rate" required explanation. None was provided. As a result, the Court concluded that the decision could not stand.

Judicial Review: The Legal Framework and Its Role Here

Judicial review allows taxpayers to challenge the lawfulness and reasonableness of decisions made by administrative bodies such as CBSA. Importantly, judicial review does not reconsider the underlying tax liability; instead, it examines whether the decision-maker applied the correct policy framework, acted fairly, and provided adequate reasoning.

In this case:

• Lufthansa accepted the GST reassessment but challenged CBSA's discretionary refusal to grant interest relief.
• The Federal Court applied the Vavilov standard, which requires decisions to be justified, transparent, and intelligible.
• Because CBSA's reasons did not address the key submissions, the decision was unreasonable.
• The Court set aside the decision and returned the matter to CBSA for redetermination using the correct analytical framework.

Judicial review thus became the appropriate vehicle for correcting a flawed administrative decision.

Implications for Canadian Businesses and Importers

The decision carries several important lessons:

• CBSA must conduct a genuine wash-transaction analysis when taxpayers demonstrate that no revenue loss is possible.
• Importers are entitled to administrative decisions that address their evidence and provide adequate reasons.
• Failure by CBSA to consider applicable internal policies can render a decision unreasonable.
• Judicial review is an effective safeguard for importers facing interest obligations that arise solely from technical mistakes rather than substantive tax non-compliance.
• For industries such as aerospace, manufacturing, energy, and technology — where substantial imports are routine — the decision reinforces the value of obtaining advice from a seasoned Canadian tax lawyer when preparing interest-relief submissions.

David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm and is a Certified Specialist in Taxation Law who has completed the CICA in-depth tax planning course. He appears regularly in print, radio and TV and blogs extensively.  

With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, cryptocurrency traders, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax audit representation and tax litigation. Visit www.Taxpage.com and email David at david@taxpage.com.

Read the original article in full on Taxpage.com. Author photo courtesy Rotfleisch & Samulovitch P.C. Title image: Photo by Hakan Koc on Unsplash. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about specific circumstances.