Beyond the COVID-19 tax measures: Taxpayers may apply for additional waiver of penalties and interest

As part of its COVID-19 Economic Response Plan, the Government has taken a number of steps to alleviate hardships faced by taxpayers. As discussed in our previous blog post, these measures include filing deadline extensions and payment deferrals to help individuals and businesses coping with mandatory business closures and self-isolation.

For returns filed and payments made by the extended deadlines established by the Government, which vary according to the tax in question and category of taxpayer (the “COVID-19 relief periods”), the CRA announced that it will not charge penalties and interest. The CRA, however, will not automatically waive penalties and interest in relation to tax balances that are outside of the COVID-19 relief periods.  This means that interest will continue to accrue on tax balances that pre-existed the COVID-19 outbreak, and those that remain unpaid after the expiration of the COVID-19 relief periods. The CRA has indicated that it will consider requests from taxpayers to cancel or waive penalties and interest on tax balances not covered by the COVID-19 relief periods on a case-by-case basis, and that such requests will be given priority once its business operations resume.  As many taxpayers may be facing penalties and interest as a result of the pandemic, this blog post provides an overview of the taxpayer relief provisions.

The CRA’s power to waive penalties and interest

Subsection 220(3.1) of the Income Tax Act and section 281.1 of the Excise Tax Act grant the Minister of National Revenue, through the CRA, discretion to cancel or waive all or any portion of any penalty or interest that would otherwise be payable by a taxpayer or a partnership for any tax year (or fiscal period, for a partnership) that ended within 10 years before the calendar year in which the request is made. For interest, the 10-year limit refers to years during which the interest accrued, not the year for which the tax was originally payable (see Bozzer v. R., 2011 FCA 186).

CRA guidelines

The administrative guidelines the CRA will follow in deciding whether to grant relief in respect of income taxes and GST/HST are found in Information Circular IC07-1R1: Taxpayer Relief Provisions and GST/HST Memorandum 16-3, GST/HST – Cancellation or Waiver of Penalties and/or Interest (together, the “Waiver Guidelines”).

The Waiver Guidelines establish that relief from penalties and interest may be granted where the following types of situations exist and justify a taxpayer’s inability to satisfy a tax obligation or requirement: (1) extraordinary circumstances; (2) inability to pay and financial hardship; and (3) CRA delay (the “relief grounds”).

The Waiver Guidelines are not legally binding. Thus, the CRA may not deny a request simply because the taxpayer’s circumstances do not squarely fall into one of the relief grounds. In practice, however, it is difficult to find instances where the CRA has granted a relief application not based on one of the relief grounds.

Extraordinary circumstances

The Waiver Guidelines indicate that waiver or cancellation may be warranted where the penalty or interest resulted from extraordinary circumstances beyond a taxpayer’s control, such as natural or human-made disasters, civil disturbances or disruptions in services, serious illness or accidents, or serious emotional or mental distress.

Historically, the CRA considered the 2013 flooding in Fort McMurray and the 2018 wildfires in B.C. and Ontario to be “natural or human-made disasters”. Health issues such as the 2003 SARS epidemic and 2000 E. coli water contamination in Walkerton, Ontario were also considered to be extraordinary circumstances warranting relief of penalties and interest for those affected.

The automatic granting of relief for penalties and interest otherwise arising within the COVID-19 relief periods suggests that the COVID-19 pandemic should constitute an “extraordinary circumstance”. Unclear, however, is the extent to which the CRA will view the pandemic as preventing taxpayers from complying with the Income Tax Act or the Excise Tax Act for periods outside the COVID-19 relief periods.

Inability to pay and financial hardship

The Waiver Guidelines provide for relief from penalties and interest where there is a confirmed inability to pay all amounts owing. For example, relief may be appropriate when the demonstrated inability to pay requires an extended payment arrangement; when payment of the accumulated interest would cause a prolonged inability to provide basic necessities (financial hardship) such as food, medical care, transportation, or accommodation; or when a taxpayer cannot make a reasonable payment arrangement because the interest charges would absorb a significant portion of the payments.  We anticipate many taxpayers may find themselves in these situations as a result of the pandemic.

For requests made based on inability to pay or financial hardship, taxpayers are typically required to provide full financial disclosure including a statement of income, expenses, assets, and liabilities, along with supporting documents (such as bank and credit card statements for the past three months, loan and mortgage statements, and financial statements).

The CRA will not usually consider cancelling a penalty based on inability to pay or financial hardship unless extraordinary circumstances prevented compliance. However, the Waiver Guidelines acknowledge that there could be exceptional situations for which penalties are cancelled; for example, when a business is experiencing extreme financial difficulty and enforcement of such penalties would jeopardize the continuity of its operations, the jobs of the employees, and the welfare of the community as a whole.

CRA delay

The Waiver Guidelines also provide for the cancellation or waiver of penalties and interest due to the actions of the CRA. These include processing delays or errors, mistakes in publicly-available CRA material, incorrect CRA advice, CRA delays in providing information necessary for the taxpayer to make a required payment, or undue delays in resolving an objection or an appeal or in completing an audit.

As part of its response to COVID-19, the CRA announced that any objections not related to Canadians’ entitlement to benefits will be temporarily held in abeyance, and audit activities – such as launching new audits, sending requests for information in relation to existing audits and finalizing audits – have been suspended. One would expect that interest accruing in a period during which an audit or appeal was unilaterally suspended by the CRA due to COVID-19 should be waived.[1]

Conclusion

The CRA has acknowledged that the COVID-19 crisis is an “extraordinary circumstance” by pre-emptively waiving penalties and interest for tax balances falling within the COVID-19 relief periods. Although the CRA has stated that it will only consider waiving penalties and interest on a case-by-case basis for tax balances outside of the COVID-19 relief periods, it is reasonable to expect that the impacts of the COVID-19 crisis will be recognized as a basis for relief where such impacts persist. Taxpayers facing compliance difficulties and hardship due to the COVID-19 crisis should consider requesting relief for periods outside the COVID-19 relief periods.

[1]               Taxpayers with tax years under audit, objection or appeal approaching the expiration of the 10-year limit should consider filing a protective application for relief prior to that deadline.  The 10-year limit is statutory and is not affected by the CRA holding audit and objection processing activities in abeyance due to the COVID-19 pandemic.