Canada: Tax Court Suggests CRA Be More Responsible In Evaluating Diligence Defences

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Tax, September 2009

The recent decision in Home Depot of Canada Inc. v. Her Majesty the Queen dealt with the common law defence of due diligence, as opposed to one of the statutory defences available to directors under subsection 323(3) of the Excise Tax Act (the ETA) or subsection 227.1(3) of the Income Tax Act. It serves to demonstrate the function of the common law due diligence defence in connection with strict liability administrative penalties and suggests that the Canada Revenue Agency (CRA) should apply commercial common sense before dismissing a taxpayer's defence of due diligence.


Home Depot was assessed late filing penalties pursuant to subsection 280(1) of the ETA. As part of its retail business in Canada, Home Depot collected and remitted GST as required by the ETA. Since 2005, it had contracted out its GST remitting and reporting obligations to Deloitte Tax LLP (Deloitte Tax), the largest North American provider of sales tax compliance services. Home Depot had remitted millions of dollars of GST each year, and with two exceptions, it made all its payments on time. Due to a clerical error, the two monthly GST returns and the accompanying remittances were not received on time by the CRA because Deloitte Tax had sent them to the wrong address. Once the errors were realized, Home Depot took immediate steps to re-file those returns and pay all outstanding amounts including interest. In respect of these errors, the CRA imposed late filing penalties in the amounts of C$77,097.76 and C$326,223.74. Home Depot appealed the late filing penalties on the basis that it exercised due diligence in attempting to meet its obligations under the ETA.


The parties agreed that Home Depot could not succeed in a due diligence defence merely because it hired a third party to perform its GST obligations, and therefore, the actions of Deloitte Tax were relevant in evaluating the due diligence claim. The Minister took the position that the due diligence defence was only available in very narrow and restrictive circumstances and was not available where a taxpayer collected GST from customers but failed to remit the correct amount by the due date. The Honourable Justice Campbell Miller rejected the Minister's position. Miller J., relied on the Federal Court of Appeal decision of Corporation de l'Ecole Polytechnique v. Canada, where the court stated "that there is no bar to the defence argument of due diligence, which a person may rely on against charges involving strict liability, being put forward in opposition to administrative penalties ... due diligence excuses either a reasonable error of fact, or the taking of reasonable precautions to comply with the [Excise Tax] Act."

The Minister then took the position that "in considering the question of what reasonable precautions were taken, the issue must be narrowed to ask [whether] reasonable precautions [were] taken to ensure the remittance was mailed or delivered to the correct address." Miller J., took a broader approach to addressing whether Deloitte Tax, as agent for Home Depot, took reasonable precautions to properly remit GST in accordance with section 280 of the ETA. Specifically, Miller J., decided that Deloitte Tax's overall compliance system should be reviewed and not just the specific precautions in place to make sure that remittances were properly addressed and mailed. In assessing the overall system, Miller J., found Deloitte Tax to be "a well-oiled sales tax remitting machine". The failure to properly deliver the November and January remittances was due to simple human error.

Miller J., noted that it is easy to be critical of behaviour after an error has been committed and that one can always find something else a taxpayer might have done. Miller J., stated however, "that is not the test. The test is whether what the taxpayer in fact did was sufficient reasonable precaution – not that the taxpayer did not hold the hand of the employee throughout every single task no matter how menial."

Finding in favour of Home Depot, Miller J., concluded that even if there were some safeguards missing at the mailing stage of the system, taken cumulatively, they would not outweigh the overall care and attention of Deloitte Tax in fulfilling its obligation to Home Depot to file returns and remittances on a timely basis.


The most interesting part of this case is the obiter dictum (the observation of the court which does not form part of the official reasons for the decision in the case). Miller J., was of the view that the case should never have gone to trial. He acknowledged that the penalty under subsection 280(1) of the ETA applies automatically when GST is remitted late. However, he went on to state that "a step back for a balanced look by a CRA official exercising a good dose of commercial common sense should not have resulted in [a] relentless pursuit of a half-million dollar penalty." He made this statement after noting Home Depot's history and the positive efforts it made to comply with its GST obligations. These comments provide a clear statement to CRA that it should be more reasonable in its application of administrative penalties where otherwise diligent and compliant taxpayers happen to make the occasional innocent mistake.


This case comes on the heels of two other recent Tax Court of Canada cases which were decided under the informal procedure process. These cases found that the automatic penalties which applied, under section 163 of the Income Tax Act, could be avoided where the taxpayer exercised due diligence.

While, historically, the CRA has taken the position that penalties should be applied automatically and it is up to the taxpayer to apply under the taxpayer relief (fairness) provisions for a waiver or cancellation of the penalties, the taxpayer relief provisions do not specifically allow for the defence of due diligence and therefore, they may not be applied on that basis.

The interesting question for the future will be to see whether such positive statements by the courts will be enough to cause CRA to accept due diligence defences (where the taxpayer relief provisions might not apply) before proceeding through litigation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
30 Oct 2019, Other, Toronto, Canada

The materials on the Blakes Business Class website are provided for informational purposes only. Accessing this information does not create a lawyer-client relationship.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions