Ten Year Limitation Period for CRA to Waive Penalties and Interest – Information Circulars IC00-1R5 Voluntary Disclosures Program and IC07-1 Taxpayer Relief Provisions Updated – A Toronto Tax Lawyer Analysis – Part II
In part I of this article, our Toronto tax law firm discussed the CRA's discretionary powers to waive or cancel all or part of the interests and penalties owed by a taxpayer. We also discussed the two programs the CRA created to facilitate the use of those powers - the Taxpayer Relief Provisions and the Voluntary Disclosures Program.
In part II of this article, we will discuss the 10 year limitation period imposed upon the CRA regarding their ability to waive interests and penalties. In addition, we will also discuss how the tax case of Bozzer v Canada has clarified how that 10 year period should be determined.
Ten Year Limitation Period
While the Tax Act grants the CRA discretion to waive or cancel interests and penalties, the Tax Act also specifies that there is a 10 year limitation period after which the CRA is no longer able to waive or cancel interests and penalties. What was unclear was how the 10 year limitation period was determined. Specifically, in the tax case of Bozzer v. Canada, Mr. Bozzer applied for Taxpayer Relief in 2005 regarding penalties and interests from tax debts that arose in 1989 and 1990. The CRA denied his application saying that the tax debts arose in 1989 and 1990, which was more than 10 years before the date of his application for relief. As such, the CRA claimed that they had no discretion under subsection 220(3.1) of the Tax Act to waive any of the penalties or interests that Mr. Bozzer owed stemming from those tax years. Mr. Bozzer's position was that, although the tax debt originated more than 10 years from the date of his application, interest subsequently accrued on a yearly basis. That is to say, the CRA should have discretion to waive or cancel interest that accrued within from 1995 to 2005 in Mr. Bozzer's case.
Ultimately, the Federal Court of Appeal agreed with Mr. Bozzer's interpretation. Specifically, the Court noted that the text of the legislation was ambiguous and could conceivably be interpreted both ways, but the Court focused on the purpose of the legislation being essentially to promote fairness and considered a hypothetical scenario. In that scenario, a taxpayer is obligated to remit taxes for a particular year, but before preparing the tax return, the taxpayer is injured in a car accident and is in a coma for a number of years. After regaining consciousness and dealing with mental and physical rehabilitation, the taxpayer is finally able to turn his mind to filing his tax return for that before mentioned year; however, 11 years have passed by this time. By the time the taxpayer is assessed, 12 years have passed – under the CRA's interpretation, the taxpayer would be barred from any penalty or interest relief, while under Mr. Bozzer's interpretation, the taxpayer would be able to apply for a waiver of the interest that accrued in the 10 years preceding his application. The Court found that in such a scenario, the CRA's interpretation would lead to a harsh result that was contrary to the purposes of section 220(3.1). The Court also looked at the wording of other sections of the Tax Act where the language of the section clearly made a forward looking effect that does not exist in section 220(3.1). The implication being that had the legislature intended that section 220(3.1) was to have a look forward effect, they knew how to draft it to make that clear, but did not.
As such, the Court has clarified that the 10 year limitation period in section 220(3.1) does not disallow the CRA from exercising their discretion to waive or cancel interest that has accrued within the preceding 10 years of an application for relief, even if the base tax debt arose more than 10 years before the application. On January 13, 2017, the CRA updated their information circulars IC00-1R5 Voluntary Disclosures Program and IC07-1 Taxpayer Relief Provisions to reflect the results of this tax case. Call our experienced Toronto tax law firm and make sure everything that can be done is being done to reduce and mitigate your tax liability.
Go back to Part 1.
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