CRA Remission Guide: Canadian tax lawyer's overview
David Rotfleisch looks at the last resort of taxpayers for relief from tax debt and enforced penalties, including interest, in light of the COVID-19 pandemic
Introduction – Tax Remission Order
Canada's tax laws contain provisions that are carefully crafted and precisely designed to provide taxpayers with various avenues to resolve their tax issues. However, in certain circumstances, Canada's tax laws do not provide for adequate relief, or the strict application of certain provisions can lead to unfair results.
A tax remission order is a taxpayer's a last resort for relief from tax debt and enforced penalties (including interest), where all other avenues for taxpayer relief have been exhausted. Under subsection 23(2) of the Financial Administration Act "the Governor in Council may [..] remit any tax or penalty, including any interest pay or payable thereon, where the Governor in Council considers that the collection of the tax or the enforcements of the penalty is unreasonable or unjust or that it is otherwise in the public interest to remit the tax or penalty." However, because tax remission orders are discretionary, typically, they are only granted in extraordinary circumstances. If you have exhausted all taxpayer relief avenues, consider contacting our certified specialists in taxation Canadian tax lawyer for appropriate tax guidance with respect to a possible tax remission order application.
The Canada Revenue Agency (CRA) developed the "CRA Remission Guide" (2014) to (i) provide its employees with the information required to review and process a tax remission request (ii) ensure that its employees examine taxpayers' tax remission requests in a fair and consistent manner, and (iii) assist its employees in determining whether (or not) a collection of tax or enforcement of penalties is (a) unreasonable (b) unjust, or (c) if a tax remission order is in the public interest. In this article, our top Ontario tax lawyers provide an overview of the "CRA Remission Guide" and tax guidance on tax remission orders.
The "CRA Remission Guide"
A tax remission order is an extraordinary measure that allows the Governor in Council to grant taxpayers with either full or partial relief from income tax, interest, penalty, or other debts in certain circumstances where relief is justified but cannot be granted pursuant to Canada's tax laws. Subsection 23(1) of the Financial Administration Act defines "other debt" as "any amounts owing to Her Majesty, other than a tax or penalty or an amount in which subsection 24.1(2) applies." Other debts may include amounts such as Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums and Canada Child Tax Benefit (CCTB) repayments. As discussed further below, it is uncertain whether a tax remission application would be considered in context of COVID-19 related income support benefits.
A tax remission request may be made for amounts paid or payable in respect of the following:
- Federal income tax;
- The former federal sales tax (FST);
- The goods and services tax (GST);
- The harmonized sales tax (HST) in the participating provinces;
- Excise taxes or duties;
- Penalties related to the above.
A tax remission order is typically granted after other avenues, such as notices of objection, appeals to the Tax Court of Federal Court of Appeal, or taxpayer relief requests have been unsuccessfully pursued by the taxpayer.
Application for A Tax Remission Order – The Process
CRA field officers are responsible for (i) conducting the initial interview with the taxpayer who is applying for a tax remission order (ii) compiling the history and analyzing the taxpayer's case, and (iii) preparing a recommendation for Headquarters. Next, the tax remission workload is allocated between two Legislative Policy and Regulatory Affairs Branch ("Headquarters") directorates. In particular, tax remission requests pertaining to income tax are directed to the "Remissions and Delegations Section" or "Legislative Policy Directorate" or "Legislative Policy & Regulatory Affairs Branch". Tax remission requests pertaining to GST/HST, excise taxes, duties or the former federal sales tax are directed to "Business Integration and Program Operations Division" or "exercise and GST/HST Rulings Directorate" or "Legislative Policy and Regulatory Affairs Branch". Officials of the appropriate Directorate are responsible for (i) reviewing all tax remission orders (ii) providing guidance to field officers, and (iii) evaluating each tax remission request and preparing reports, with recommendations, for the Headquarters Remission Committee (the "Committee"). The Committee is responsible for reviewing all tax remission requests and for making recommendations to the Assistant Commissioner, Legislative Policy and Regulatory Affairs Branch.
The Assistant Commissioner reviews the recommendations from the Committee and determines whether to deny the tax remission request or to forward a positive recommendation to the Minister of National Revenue (the "Minister"). If the tax remission request is denied, the Assistant Commissioner will inform the taxpayer in writing and provide reasons for the denial. However, if the tax remission is recommended, a draft tax remission order is prepared by Headquarters, which is examined by the Department of Justice and subsequently submitted to the Assistant Commissioner for Approval, along with supporting documents. The draft tax remission order is then submitted to the Commissioner and to the Minster. If the draft tax remission order is approved at each level, a ministerial recommendation for the tax remission order is subsequently forwarded to the Governor of Council for consideration. If the draft tax remission order is denied, the matter is referred back to the Assistant Commissioner for appropriate action.
Tax remission requests involving GST/HST and customs duties that are paid or payable on imported goods fall under the responsibility of the Canada Border Services Agency (CBSA) of the Department of Finance depending on the basis of the request. Tax remission requests relating to administrative issues are sent to CRA's Trade Policy Division. And tax remission requests relating to legislative issues are sent to the International Trade Policy Division at Finance Canada.
Tax Remission Requests and When Are They Appropriate?
A tax remission request can be initiated by the experienced Canadian tax lawyer for a taxpayer who is impacted or by federal or provincial members of Parliament. The CRA can also initiate a tax remission request in certain circumstances where there is concrete evidence confirming that granting such a relief is warranted.
A tax remission order is typically granted after other avenues, such as objections, appeals to the Tax Court of Federal Court of Appeal, or taxpayer relief requests have been unsuccessfully pursued by the taxpayer. A tax remission request will not be reviewed by CRA officials while the taxpayer's case is being reviewed in the objection process or it is before the Tax Court or the Federal Court. However, the CRA Remission Guide states that CRA employees should not require the taxpayer to use the objection or appeals processes where there is clear evidence that the requested relief, in the tax remission request, would not be available through other avenues such as, for example, notices of objection, appeals to the Tax Court of Federal Court of Appeal, or taxpayer relief provisions.
Tax Remission – Penalties, Interest and Income-Tested Credits and Amounts
Under section 23 of the Financial Administration Act, the Governor in Council may grant a tax remission of penalties and/or interest with respect to assessed amounts of tax, even if there is no remission of tax. In particular, a remission of penalties and/or interest may be granted in cases where taxpayer relief provisions do not apply.
Credit interest is not applicable to payments or adjustments made as a result of a tax remission order, and the Federal Government is precluded from paying credit interest on amounts forgiven by means of a tax remission order.
As previously mentioned, subsection 23(1) of the Financial Administration Act defines "other debt" as "any amounts owing to Her Majesty, other than a tax or penalty or an amount in which subsection 24.1(2) applies." Other debts may include amounts such as Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums. Income-tested credits and benefits, such as the Canada Child Tax Benefit (CCTB), may also be considered for a tax remission order.
Millions of Canadians have been financially impacted by the ongoing COVID-19 pandemic. In response, the Government of Canada introduced several COVID-19 related income support benefits including, but not limited to, the Canada Emergency Response Benefit (CERB). Between March 15, 2020 and September 26, 2020, the CERB provided up to $14,000 in financial support to employed and self-employed Canadians who have been directly affected by the COVID-19 pandemic. The "Request for Taxpayer Relief - Cancel or Waive Penalties and Interest" (Form RC4288) (previously known as a fairness application) is a viable option for Canadians with a tax debt consisting of potentially large interest and penalty amounts, including those arising from receipt of CERB. The CRA Remission Guide is dated October 2014 and it is uncertain whether amounts owing, interest and penalty arising from receipt of CERB would be considered for a tax remission order. More specifically, in context of CERB it is uncertain whether (1) CERB falls under the categories of "other debts" and/or "income-tested credits or benefits," and (2) whether a tax remission order could be considered in context of CERB.
Applying for A Tax Remission Order – The Guidelines
The CRA Remission Guide provides a framework within which a tax remission request might be considered. In particular, CRA developed the following guidelines for decision makers to apply in determining whether (or not) to recommend a tax remission order request in any given case:
- Extreme hardship;
- Financial setback coupled with extenuating factors;
Unintended result of the legislation; and
- Incorrect action or advice of CRA officials.
Yet, these guidelines do not pertain to all circumstances. Other relevant factors that decision makers ought to consider may include, but are not limited to, the taxpayer's compliance history, credibility, circumstances, age and health.
The CRA Remission Guide applies to taxpayers who are faced with extreme hardship and it may also apply to corporations whose financial issues adversely impact a large group of taxpayers or the community. Generally, extreme hardship is considered to exist if the taxpayer and their spouse or common-law partner have an annual family income, for the year in which the tax remission is requested, and each subsequent year, that is less than the low income cut-offs established by Statistics Canada for the geographical area in which the taxpayer resides. Extreme hardship, in context of a tax remission order, is relevant to the taxpayer's income and resources and whether (or not) they are sufficient to resolve the tax liability and or enforced penalties. An application for a tax remission order must demonstrate that payments of the taxes, penalties or interest owing would cause an extreme financial hardship for the taxpayer or Corporation applying for the relief.
Financial Setback Coupled with Extenuating Factors
A tax remission order may be recommended in circumstances where an additional tax debt would strain the taxpayer's limited access to financial resources. A financial setback is viewed by the courts as less severe than extreme hardship. Financial setback involves determining the significance of the amount of the tax liability involved for the taxpayer. For the CRA Remission Guide to apply, a significant financial setback must be present as well as at least one extenuating factor. The two main extenuating factors are:
- Circumstances beyond a taxpayer's control and Taxpayer error.
Circumstances beyond a taxpayer's control may include, but are not limited to, a series of illnesses which may warrant consideration for a tax remission order. However, the fact that a taxpayer made an error that led to excess tax liability does not in itself constitute an extenuating factor. In certain circumstances, the fact that the taxpayer requesting the tax remission order lacks knowledge in Canadian tax law may be viewed as an extenuating factor if a detrimental decision or a lack of appropriate action is associated with the tax issue related to the taxpayer's inability to understand or foresee the tax consequences (i.e., a taxpayer with mental disabilities). Further, if there is sufficient evidence shedding light on a taxpayer error that should have been detected and corrected by CRA officials, this may constitute an extenuating factor and warrant consideration for a tax remission order.
Unintended Results of The Legislation
The CRA Remission Guide concedes that in certain circumstances the application of Canada's tax laws may result in tax consequences that are inequitable to taxpayers and contrary to the intent of the applicable legislation. In this context, a tax remission order may be recommended to correct the inequity until such a time when a legislative resolution can be achieved. In these circumstances, the Department of Finance must agree with the relief being granted.
Incorrect Action or Advice of CRA Officials
Tax remission requests may be considered when a taxpayer is required to pay additional tax and or penalties (including interest) because CRA officials have taken an incorrect action or provided incorrect advice. To determine whether a taxpayer took the reasonable steps to address an alleged incorrect action or advice of CRA officials, that taxpayer's personal circumstances should be considered. Accordingly, a tax remission order will be considered where:
- There is no evidence of bad faith on the part of the taxpayer requesting the tax remission orders;
- The taxpayer could not reasonably have been expected to initiate timely actions to avoid or minimize the tax, collect and remit the tax or claim a rebate for GST/HST;
The taxpayer requested a tax remission within a reasonable time period to enable CRA officials to properly investigate the matter; and
- There is written evidence to substantiate the fact that CRA officials have taken incorrect action or provided incorrect advice to the taxpayer. In the absence of written evidence, the facts may be verified by other acceptable means.
The CRA Remission Guide provides that if CRA officials make an error in assessing tax, the error must have been recognizable at the time of the assessment and not in light of subsequent circumstances (e.g., when a court reverses a previous decision upon which the assessment is based). When it is established that an assessment is in error, at the same time, it must also be established that the taxpayer could not reasonably have been expected to:
- File a waiver;
- File a Notice of Objection to the assessment;
Provide new information within the required time limits; or
- Resolve the issue through any other avenue.
Further, actions or advice by CRA officials that may have misled or discouraged the taxpayer from taking timely and appropriate actions, should also be taken into consideration when deciding on a tax remission request.
Tax Remission Request Denied
Circumstances where a tax remission order would not likely be recommended may include where:
- Financial hardship is not considered to be extreme. That is, where the taxpayers' current and anticipated personal resources are adequate to pay the debt;
- There is no reasonable basis upon which to conclude that a taxpayer's claim of CRA's error is valid;
There is no evidence that financial setback was due to factors beyond the taxpayer's control; or
- It is reasonable to conclude that the taxpayer was negligent or careless in complying with the law or there is evidence that he or she made an imprudent decision.
Tax Remission Report
As previously mentioned, field officers are responsible for preparing a recommendation report for Headquarters. These reports include: (i) taxpayer's identification (ii) third-party authorization (if any) (iii) an overview of the issue(s) on which the tax remission is sought and the years or reporting periods involved (iv) a complete description of all the relevant facts and circumstances and any relevant issues that gave rise to the tax remission requested (v) the basis for the tax remission request (vi) the availability of alternative relief, if any, such as the taxpayer relief provisions (vii) tax, penalties, and interest amounts (viii) conditions, if any, upon which a tax remission order may be granted requiring the taxpayer to take certain actions, and (ix) recommendations as to whether the tax remission should be allowed or denied with reasons support the recommendations.
Tax Remission Requests and Judicial Review
The CRA Remission Guide provides that there is no formal right of appeal for taxpayers who have been denied a tax remission order since the ministerial recommendations are discretionary. However, unsuccessful taxpayers are entitled to apply for a judicial review of the decision by the Federal Court, pursuant to section 18.1 of the Federal Courts Act, within 30 days after the decision is communicated to the taxpayer.
During a judicial review, the Federal Court will focus its review on whether (or not) the Minister's discretion was properly exercised. If the Federal Court determines that the ministerial discretion was not properly exercised, it will not overturn the Minister's decision but will refer the matter back to the Minister for reconsideration.
Pro Tax Tips – Tax Guidance and Tax Remission Orders
A tax remission order is an extraordinary measure. It is difficult to provide exact tax guidance as to whether (or not) a tax remission order will be recommended without a detailed review of the facts. While the CRA Remission Guide provides a framework within which an application for a tax remission order might be considered, these guidelines are inconclusive. In addition, the CRA Remission Guide is intended to provide CRA officials with the information needed to review and process a tax remission request, however, it is not binding on the CRA, nor is it the law.
David J Rotfleisch, CPA, CA, JD, is the founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, 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 litigation. Visit www.Taxpage.com and email David at firstname.lastname@example.org.