Example 1

Facts

1. A registrant files a GST/HST return when required and remits the net tax based upon the registrant’s calculation.
2. The registrant makes a mathematical error on the return resulting in an insufficient remittance of net tax.
3. In addition to the unremitted amount of net tax, a penalty of 6% per year and interest at the prescribed rate is payable.
4. The registrant contends that the failure to remit was not deliberate and merely an error in the net tax calculation.

Decision

In this case, the CRA will not accept a due diligence defence to cancel the penalty.

Rationale

Although the registrant made errors that are attributable neither to gross negligence nor to wilful intent, the making of unintentional errors is not in itself sufficient to warrant the acceptance of a due diligence defence. The defence of due diligence requires affirmative proof that reasonable care was exercised to ensure that errors were not made. The payment or remittance of an insufficient amount was caused not as a result of any difficulty or lack of clarity with the legislation, but merely through an inaccurate calculation of the amount owing.

Example 2

Facts

1. A registrant concerned primarily with the day to day operations of the business hires an outside bookkeeping firm to account for the GST/HST and prepare the returns.
2. The registrant signs each completed return prepared by the bookkeeper, encloses the remittance as indicated on the return, and mails in the return by its due date.
3. Upon audit, the CRA determines that errors have been made on several returns resulting in an additional assessment of net tax, plus the 6% penalty and interest under subsection 280(1).
4. The bookkeeping firm does not provide any credible evidence to demonstrate that any particular action that they have taken on behalf of the registrant lends support to the registrant’s due diligence defence.

Decision

Based on these facts, the registrant is not considered to have exercised due diligence in ensuring that the correct amount of net tax was remitted when required.

Rationale

It is incumbent upon persons to familiarize themselves with their obligations under the ETA, and to ensure that those obligations are met. The registrant relied solely upon a bookkeeping firm which was unable to satisfy these obligations or to provide evidence that would support the registrant’s due diligence defence.

In this case, the registrant’s actions do not meet with the degree of “reasonable care” that must be taken in order for a due diligence defence to be accepted. The registrant remains obligated to remit the correct amount of net tax in spite of the fact that it was the bookkeepers who failed to determine the correct amount on behalf of the registrant.

Example 3

Facts

1. In July 2006, a registrant is the sole proprietor of a weight training equipment store located in Ontario. The store owner carries goods that are taxable at the rate of 6% and products that are zero-rated (subject to tax at the rate of 0%).
2. In September 2006, the registrant begins to stock a chocolate flavoured “energy bar”. The bar’s ingredients consist of glucose, corn syrup, fructose, brown rice, whole oats, rice crisps, hydrogenated soybean oil and carrageenan with a chocolate coating making up 5% of the total content.
3. The product literature describes the bar as “a delicious source of energy for breakfast, lunch, or anytime.”
4. The registrant checks the other products in the store categorized as “meal replacements” and determines that tax is not charged in respect of these types of items.
5. The registrant asks the representative for the distributor of the bar whether or not it is subject to tax at the rate of 6%. The representative advises that the bar is not taxable since it is considered to be a “meal replacement” rather than “candy”.
6. The registrant contacts a local CRA office and asks a representative whether or not tax should be charged on “meal replacements”. The representative, who bases the decision on the limited information provided, confirms that “meal replacements” are zero-rated.
7. The registrant reviews some CRA publications but does not draw any conclusions from them as to the tax status of the bar.
8. The ETA is reviewed by the registrant. Under section 1 of Part III of Schedule VI to the ETA entitled “Basic Groceries”, the registrant notices that supplies of food for human consumption are zero-rated with one of the exceptions being “confectionery that may be classed as candy”.
9. For greater certainty, the registrant checks with an accountant who provides an opinion in writing that if the bar is a “meal replacement” then it is zero-rated and the registrant should not charge tax.
10. Based on all of the information obtained, the registrant believes that the bars are zero-rated and proceeds to sell them without charging tax.
11. During the course of an audit conducted by the CRA in January 2007, the auditor determines that these “energy bars” are not “meal replacements” and are subject to tax at the rate of 6%.
12. The amounts that should have been collected on the sales of these bars plus a 6% penalty and interest at the prescribed rate are assessed by the CRA.
13. The registrant makes a request to the CRA to give consideration to cancelling the penalty based on a due diligence defence.

Decision

Based on the facts provided, the CRA would accept the registrant’s due diligence defence and cancel the 6% penalty.

Rationale

In making the determination whether or not tax should be charged on an item, the registrant exercised the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances. The registrant researched product information, compared the product with what the registrant thought were similarly classified items, consulted CRA publications and the ETA, and questioned the distributor of the product. Furthermore, the registrant sought formal advice from an accountant, and unknowingly provided incomplete information to obtain advice from CRA officials.

Example 4

Facts

1. A registrant who is a sole proprietor completes a GST/HST return on which the amount of GST/HST collected is reported. It is the registrant’s intention to mail the return with the correct remittance prior to the due date.
2. Prior to the due date of the return, there is a death in the registrant’s immediate family. The registrant must assume the responsibilities as Executor to the Estate.
3. The registrant temporarily delegates the bookkeeping duties to a part-time sales employee.
4. The part-time sales employee mails in the return late and remits the correct amount.
5. The CRA charges a penalty of 6% per year and interest at the prescribed rate since the registrant has failed to remit the amount when required.
6. The registrant contends that extraordinary circumstances beyond the registrant’s control prevented the registrant from filing and remitting the correct amount on time.

Decision

Based on these facts, the CRA would not accept the registrant’s due diligence defence as the penalty was exigible in this case. However, the registrant may be eligible for cancellation of the penalty and interest under the taxpayer relief guidelines as explained in GST/HST Memorandum 16.3, Cancellation or Waiver of Penalties and/or Interest.

Example 5

Facts

1. A registrant who is a sole proprietor completes a GST/HST return on which the amount of GST/HST collected is reported. It is the registrant’s intention to mail the return with the correct remittance prior to the due date.
2. Prior to the due date of the return, there is a death in the registrant’s immediate family. The registrant must assume the responsibilities as Executor to the Estate.
3. The registrant temporarily delegates the bookkeeping duties to a part-time sales employee.
4. The part-time sales employee mails in the return late and remits the correct amount.
5. The CRA charges a 1% penalty for failing to file the return by its due date, and interest at the prescribed rate since the registrant has failed to remit the amount when required.
6. The registrant contends that extraordinary circumstances beyond the registrant’s control prevented the registrant from filing the return and remitting the correct amount on time.

Decision

Based on these facts, the CRA would not accept the registrant’s due diligence defence as the penalty was exigible in this case. However, the registrant may be eligible for cancellation of the penalty and interest under the taxpayer relief guidelines as explained in GST/HST Memorandum 16.3, Cancellation or Waiver of Penalties and/or Interest.

Example 6

Facts

1. A registrant sole proprietor completes a GST/HST return on which the amount of GST/HST collected is reported.
2. The registrant submits the return and payment for the net tax owing at the registrant’s financial institution prior to the due date of the return and net tax, and receives receipts for the same.
3. Due to a computer system problem at the financial institution, the return and payment are not processed until after the due date of the return. As a result, the CRA charges the registrant a 1% penalty for failing to file the return by its due date, and interest at the prescribed rate since the registrant has failed to remit the amount when required.
4. The registrant contends that the registrant was duly diligent in filing the return and remitting the net tax owing.

Decision

The CRA would accept the registrant’s due diligence defence, and cancel the 1% penalty for failing to file the return by its due date.

Rationale

Based on these facts, the registrant had reasonable grounds to believe that the financial institution had submitted the return and remittance to the CRA on time. Therefore, the registrant acted with due diligence. However, the due diligence defence does not apply to the amount of interest assessed. The registrant may be eligible for cancellation of the interest under the taxpayer relief guidelines as explained in GST/HST Memorandum 16.3, Cancellation or Waiver of Penalties and/or Interest.