15 October 1998 GST/HST Interpretation HQR0001016 - Penalty and Interest on Closely Related Group of Joint Filers

This memo is in response to your e-mail of December 19, 1997 addressed to Pat McKinnon.

The facts of your question are:

•   One member of a closely related group of joint filers under ss. 228(7) is audited and the refund that the member claimed is reduced or negated.

•   If that refund was applied to a debit on a related account, the "invalid" credit reverses back to the first account and causes a debit on the second account to attract penalty and interest.

•   The question is who should be assessed and liable for penalty and interest?

Interpretation

The Excise Tax Act could support either party being assessed. In view of this option, caution should be exercised and that we develop and apply a consistent operational policy.

Analysis

All references herein are to the Excise Tax Act unless otherwise noted.

The person who files the rebate or refund remains unchanged in the eyes of the Act. Thus under operation of subsections 296(1) and 297(2.1) the Minister is provided with the authority assess.

In the case of an assessment of net tax of a person under subsection 296(1) it is section 230.1, that triggers the liability for the overpayment, while the overpayment of a rebate assessed under section 297 is with reference to section 264.

Section 230.1 reads, in part,

Where an amount is paid to, or applied to the liability of a person as a refund .... and the person is not entitled .... the person shall pay to the Receiver General an amount equal to the refund .... on the day the refund, interest or excess, as the case may be, is paid to, or applied to the liability of, the person.

Subsection 264(1) reads, in part,

"Where an amount is paid to, or applied to a liability of, a person .... and the person is not entitled .... the person shall pay an amount equal to the rebate, interest or excess, as the case may be, on the day the amount is paid to, or applied to a liability of, the person."

From these provisions, the liability for repayment could rest with the person who was the claimant (although it might be argued that an amount was never paid or applied against its liability). However, there is another more valid interpretation available.

Subsection 228(7) allows a person in certain circumstances, as prescribed in the "OFFSET OF TAXES BY A REFUND OR REBATE (GST) REGULATIONS", to reduce or offset their liability by applying the refund or rebate to which another person may at that time be entitled to. Important to this process is the entitlement aspect of this subsection. If it is subsequently determined that there was not an entitlement to a portion of the rebate or refund, we could assess the person who did not remit the net tax owing.

In conclusion, you may wish to consider continue to apply penalty and interest against the member who under remitted net tax where the net tax refund of the other member was overstated. Should you have any questions, I can be contacted at 954-7931.

David Crawford
General Operations Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate
Policy and Legislation

FILE CONTENTS

1. Response to Brian Paynter

2. Incoming request of Dec 1997

3. RESEARCH

•   Forms GST 303A & GST 303B

•   Policy P-140

•   OFFSET OF TAXES BY A REFUND OR REBATE (GST) REGULATIONS

•   Q & As from database

•   explanatory notes from GST database