The taxpayer relief provisions: Accessing relief from penalties and interest

Overview

Tax disputes generally hinge on whether the imposition of taxes and penalties is correct. However, there are situations where a taxpayer can be granted relief from the imposition of penalties and/or interest even if they were correctly levied. Subsection 220(3.1) of the Income Tax Act (“ITA”) provides the Minister of National Revenue (the “Minister”) with discretion to cancel or waive all, or a portion of, penalties and interest that were correctly imposed on a taxpayer. Section 281.1 of the Excise Tax Act (“ETA”) is the corresponding provision for GST matters (together, the “Relief Provisions”).

To be clear, the Minister’s discretion under the Relief Provisions only extends to the cancellation or waiver of penalties and interest but not to the imposition of taxes. This discretion, however, can still drastically reduce the ultimate amount owing to the CRA since the quantum of certain penalties can be significant (e.g., gross negligence penalties are generally computed as 50% of the taxes imposed), and the interest on tax debts (including penalties) compounds daily at a high prescribed rate, currently 7%. In 2023 and 2024, per the CRA’s financial statements, over $652 million and $563 million respectively in penalties and interest were waived or cancelled, demonstrating the significant potential relief available to taxpayers.

Importantly, the Minister can only grant relief for the 10 calendar years preceding the year in which the relief request is made. The Federal Court of Appeal in Bozzer v Canada confirmed that interest relief is available for the previous 10 calendar years even if the underlying tax debt arose over 10 years prior to the request being made. For example, if a taxpayer has a tax debt which arose in the 2005 tax year and makes a request for interest relief in 2025, the Minister could grant relief from the interest that accrued on the 2005 tax debt from January 1, 2015 onward. Interest that accrued prior to 2015 would not be eligible for relief. In contrast, relief from penalties can only be granted if the penalty arose in one of the preceding 10 taxation years.

Generally, relief will only be granted after any dispute regarding the tax liability is resolved. Since tax disputes routinely go on for more than 10 years, taxpayers are generally well-advised to file a protective request for relief prior to the expiry of the 10-year limitation period to safeguard their right to request relief at a later time. A protective relief request does not need to state the specific basis for the request, but must include basic information such as the taxpayer’s identifying information (e.g., SIN or BN), the taxation years for which the relief is requested, and the stage of the underlying dispute. The Canada Revenue Agency (“CRA”) accepts taxpayers’ use of protective relief requests, as provided at paragraph 16 of Information Circular 07-1R1 (the “Information Circular”). The request will generally be held in abeyance pending the final resolution of the tax dispute, at which time the taxpayer will have the opportunity to make submissions in support of the relief request.

Submitting a persuasive relief request

The CRA administers the Relief Provisions in accordance with its internal guidelines, set out in the Information Circular and GST/HST Memorandum 16-3 (the “GST/HST Memorandum”).

A taxpayer relief request can be made by filling out form RC4288 Request for Taxpayer Relief – Cancel or Waive Penalties or Interest or by drafting a letter which outlines the basis for the relief request. These can either be submitted online or mailed to the appropriate CRA tax centre.

Paragraph 23 of the Information Circular outlines three grounds for the granting of relief: (1) extraordinary circumstances; (2) actions of the CRA; and (3) inability to pay or financial hardship. The GST/HST Memorandum references the same circumstances under which relief might be granted. Importantly, these circumstances are not exhaustive. The Minister is required to consider other situations raised by taxpayers and may grant relief where it would be just and equitable to do so. In any event, a taxpayer will generally have a greater likelihood of success if their relief request is framed as falling within one of the three specific circumstances enumerated by the CRA. Those circumstances are discussed below, in turn.

Extraordinary circumstances

The Information Circular states that extraordinary circumstances can include, but are not limited to, natural or man-made disasters, civil disturbances, serious illness or accident, or serious emotional or mental distress. Examples of extraordinary circumstances which have been recognized by the CRA as warranting relief include COVID 19, postal strikes, and most recently, the 2025 wildfires.

The Federal Court, in decisions including Allen v Canada, Holmes v Canada, and Laflamme v Canada, has acknowledged that depression, mental illness and other psychological conditions that prevent a taxpayer from meeting their tax obligations can constitute extraordinary circumstances.

A taxpayer affected by, and seeking relief in relation to, an extraordinary circumstance must clearly document how that circumstance caused them to incur the penalty or interest. Supporting documentation such as news reports and government publications acknowledging the circumstance as well as contemporaneous documentation that demonstrates the circumstance’s effect on the taxpayer can bolster a relief application.

Actions of the CRA

Actions of the CRA that caused penalties or interest to accrue can include errors, delays and incorrect information being provided to taxpayers. From a taxpayer’s perspective, CRA actions can cause delays in making a payment which might give rise to penalties or interest. A persuasive relief application will demonstrate a clear linkage demonstrating how the CRA action resulted in the penalties or interest. To evidence this linkage, a taxpayer should assemble as much supporting documentation as possible.

Taxpayers should consider filing a request under the Access to Information Act or the Privacy Act for copies of all CRA documents relating to the taxation years in issue. This documentation may help to demonstrate the exact actions or delays caused by the CRA which warrant the requested relief from penalties and interest.

Financial hardship

Taxpayers who seek relief based on financial hardship should disclose their financial information including recent bank account and credit card statements that demonstrate their inability to pay the penalties and interest. When seeking relief on this ground, it is recommended that form RC376 be included to establish the taxpayer’s income, expenses, assets and liabilities. The Federal Court in Shea v Canada held that it is not unreasonable to deny a taxpayer’s relief request that is based on financial hardship if the taxpayer does not provide supporting documentation to support their financial position. In Cassidy v Canada, the Federal Court ordered the CRA to reconsider a taxpayer’s relief request because the CRA had not properly considered the financial hardship the taxpayer endured as a result of the 2008 economic downturn, COVID-19, and a divorce. This demonstrates that extraordinary circumstances can be the basis for a taxpayer’s claim of financial hardship.

Disputing a denied relief request

Taxpayer relief is discretionary and therefore a taxpayer does not have a right to object or appeal if the relief request is denied, or if the relief is granted but is less than requested. However, a taxpayer can apply to the CRA for a second administrative review of the decision denying their relief. The second administrative review is conducted independently by a CRA official not involved in the original decision. A second administrative review request should clearly identify any errors made in the decision and provide any new information or documentation not previously considered.

If a taxpayer’s second administrative review request is also denied or if the taxpayer is otherwise not satisfied with the extent of the relief granted on the second administrative review, the taxpayer can file an application for judicial review to the Federal Court within 30 days from the CRA’s decision being communicated to the taxpayer.

Importantly, the scope of the Federal Court’s review upon an application for judicial review is limited to determining whether the Minister’s decision was reasonable based on the information provided at the time that decision was made. This means that taxpayers will generally not be able to rely on information or documentation in support of their judicial review application which was not previously provided to the CRA. Therefore, it is critical that all relevant information and documentation be provided to the CRA at the time of the second administrative review.

The Federal Court in Jaka Holdings Ltd. v Canada affirmed that a “marked similarity” between the first and second administrative review decisions, which is tantamount to an apparent copying of the prior decision, can signal a lack of procedural fairness sufficient to allow a taxpayer’s application for judicial review. Similarly, the Federal Court in Brand v Canada held that reconsideration should be granted where the decision did not address key elements of the relief request and did not clearly explain the reasons for the denial of relief.

Conclusion

Relief requests can be a valuable option of last resort for taxpayers seeking relief from harsh penalties and significant interest which often accompany assessments of tax. To maximize the potential benefits from this avenue of relief, taxpayers and their advisors must craft a persuasive relief request while appreciating the correct avenue for disputing denied requests and potential limitation periods.