Asare v Canada: Some ins and outs of taxpayer relief

Asare v Canada: Explaining the ‘how’, ‘why’, and ‘when’ for claiming taxpayer relief

Subsection 220(3.1) of the Income Tax Act (the Act) is a general provision that provides the Canada Revenue Agency (CRA) with the discretion to waive or cancel penalties and interest accrued during the previous ten calendar years. This provision is part of Canada’s “taxpayer relief” legislation dealing with the cancellation of penalties or interest imposed under the Act. A recent Federal Court (FC) decision, Asare v Canada (National Revenue), 2022 FC 1676 (Asare) offers a useful backdrop to review some of the key components of requesting this remedy from CRA, including how to request relief, why to request relief, and when to make an application.

How to request interest and penalty relief

Taxpayer relief is properly requested by filing an RC4288, or by sending a letter to the CRA. For requests made based on an inability to pay, taxpayers should also provide a form RC376 outlining their financial situation.

All supporting information, facts, and reasons should be included in a request for taxpayer relief. As noted by the FC in Asare, taxpayer relief is a separate recourse with distinct considerations from determining the correctness of a tax assessment. Therefore, a taxpayer should consider the reasons for its request with reference to CRA’s guidelines, and clearly explain how those reasons are causally connected to desired relief from a penalty or a specific interest amount.

Reasons to request interest and penalty relief

The CRA’s Information Circular IC07-1R1 sets out reasons that may entitle a taxpayer to CRA’s discretionary relief. Although the CRA is empowered to provide relief outside these guidelines, best practice would be to work within the CRA’s established guidelines if circumstances permit.

The situations provided by CRA include (1) extraordinary circumstances, such as death or natural disasters; (2) delay by the CRA; (3) reliance on incorrect information from CRA; or (4) inability to pay/financial hardship. In respect of the first item, a recent example of relief provided by the CRA was the automatic waiver of interest on existing income tax debts from April 1, 2020, to September 30, 2020, due to the COVID-19 pandemic.

When to request interest and penalty relief

Generally, if the taxpayer has an ongoing dispute, the CRA’s procedure is to hold a taxpayer relief application until the matter has concluded, or until a taxpayer’s right of appeal has lapsed. The FC in Asare clarified that the CRA, as the administrative decision maker, was entitled to control its process for granting relief provided that the process is procedurally fair. Therefore, generally, a final tax liability will need to be determined through the normal appeal processes before applying for relief under subsection 220(3.1). However, if a taxpayer is closing in on the ten-year deadline to apply for relief on accrued interest or a penalty; the taxpayer should apply for taxpayer relief prior to the deadline, and request that the application be held until the tax liability has been settled.

Granting taxpayer relief is discretionary

A key component of administrative discretion, including in the taxpayer relief context, is that this discretion must be exercised in a manner that is reasonable. If an exercise of discretion by the CRA is unreasonable, or the CRA refuses to exercise discretion that is required by law, a taxpayer is entitled to appeal the CRA’s decision (or lack thereof) first to a second-level review at the CRA, and then to the FC.

The Asare appeal was based on a CRA appeals officer’s failure to exercise discretion. In that case, Mr. Asare (the Taxpayer) sought a negotiated settlement related to notices of objection he filed with the CRA. The notices disputed personal and corporate income tax reassessments, including the application of gross negligence penalties (GNPs) on these amounts, pursuant to subsection 163(2) of the Act. The CRA appeals officer counter-offered to vacate the GNP imposed on the Taxpayer’s corporation income tax debt for technical reasons but refused to vacate the GNP imposed personally.

The Taxpayer was prepared to accept the CRA appeals officer’s counteroffer only if the GNP imposed personally were to be waived according to subsection 220(3.1) of the Act. The appeals officer refused to vacate the GNP applied personally and informed the Taxpayer that relief from interest and penalties on fairness grounds–distinct from the legal merits of the objection–should be applied for separately as per CRA policy.

The Taxpayer sought judicial review of the appeal officer’s reluctance to consider administrative relief. Ultimately, the FC concluded that CRA appeals officer was entitled to stand by its administrative processes, by guiding the taxpayer to apply for relief through a separate channel.

Procedure is key to a successful taxpayer relief application

The Taxpayer in Asare found that a failure to follow CRA’s procedure set out in Information Circular IC07-1R1 led to his appeal being dismissed at FC. Therefore, this judgment serves as a useful reminder to carefully review CRA’s published administrative processes before requesting a specific recourse, such as the cancellation of interest or penalties under the Act’s taxpayer relief provisions.