1 February 1998 GST/HST Interpretation 1998-02-01 - Calculation of Penalty & Interest

Thank you for your electronic mail message dated September 15, 1997, concerning the application of subsection 280(1) of the Excise Tax Act (ETA) where a registrant requests an adjustment to a previously filed return to correct an error that resulted in an overpayment of a net tax refund to the registrant.

Background:

Your submission contains the following information:

A registrant files a credit return indicating GST collectible of $25,000, input tax credits (ITCs) of $50,000 and receives a net tax refund of $25,000. Several months later, the registrant advises the Department that only $30,000 of ITCs should have been claimed in the return resulting in a net tax refund of $5,000. The registrant encloses a cheque for the net tax refund overpayment of $20,000. In this situation, according to the information in your submission, the GST system does not automatically charge penalty or interest on the $20,000 overpayment nor is it done manually.

Interpretation Requested:

The question raised in your electronic mail message concerns whether or not the Department should charge penalty andor interest on the $20,000 x net tax refund overpayment. Secondly, you have asked for the Department to clarify under what circumstances penalty and interest would be applicable in this case.

Interpretation Given:

According to section 230.1 of the ETA, where an amount is paid to, or applied to a liability of a person as a refund, or as interest, under Division V of Part IX of the ETA and the person is not entitled to the refund or interest or the amount paid or applied exceeds the refund or interest to which the person is entitled, the person shall pay to the Receiver General an amount equal to the refund, interest or excess on the day the refund, interest, or excess is paid to, or applied to a liability of, the person.

In the situation described, the registrant receives an amount as a net tax refund (i.e., $25,000) in excess of that to which he was entitled (i.e., $5,000) after having reported an inaccurate ITC figure in the return filed for the reporting period. In accordance with section 230.1 of the ETA, the registrant is required to repay this overpayment (i.e., $20,000) to the Receiver General on the day the amount was paid to the registrant. For example, if the net tax refund of $25,000 was paid to the client February 6, 1997, the overpayment of $20,000 is payable to the Receiver General on February 6, 1997.

Subsection 280(1) of the ETA imposes interest and penalty where a person has failed to pay or remit an amount to the Receiver General when required under Part IX of the ETA. This subsection states that the person shall pay on the amount not remitted or paid a penalty of 6% per year, and interest at the prescribed rate, computed for the period beginning on the first day following the day on or before which the amount was required to be remitted or paid and ending on the day the amount is remitted or paid.

Subsection 296(1) of the ETA states in part that, the Minister may assess any amount payable by a person under section 230.1 of the ETA, and may reassess or make an additional assessment of that amount. In the case of the registrant in your example, this subsection provides the Minister with the authority to assess the amount payable under section 230.1 of the ETA (i.e., $20,000) and to assess the penalty and interest payable.

To clarify the different methods for calculating interest and penalty in the case of a net tax refund overpayment, two different situations (including the one that you have provided) are listed below:

Net Tax Refund Overpayment ITC Figure DecreasedNo Additional Net Tax Remittable for the Period:

In the case at hand, penalty and interest under subsection 280(1) of the ETA would apply to the net tax refund overpayment of $20,000 from the day on which it was paid to the person and ending on the day the amount is repaid. For example, suppose the credit return is filed on its due date, January 31, 1997 and a net tax refund of $25,000 is mailed to the client on February 6, 1997. The Department subsequently receives notification of the net tax refund overpayment on April 20, 1997 along with a cheque for $20,000. In this situation, the registrant would be assessed penalty (6% per year) and interest on the net tax refund overpayment at the prescribed rate beginning on February 7, 1997 (i.e., the day after the overpayment was mailed) and ending April 20, 1997 (i.e., the date the cheque was received).

Net Tax Refund Overpayment Not Entitled to any ITCsAdditional Net Tax is Remittable for the Period:

In a slightly different scenario, on April 20, 1997, the registrant advises the Department that the total amount of ITCs (i.e., $50,000) was claimed in error and encloses a cheque for $50,000 (i.e., net tax remittable of $25,000 plus the $25,000 net tax refund overpayment). The net tax not remitted for the reporting period would be $25,000 on which penalty at a rate of 6% per year and interest at the prescribed rate would accrue beginning the day after the amount was required to be remitted (i.e., February 1, 1997 the day after January 31, 1997) and ending on the day the amount is remitted (i.e., April 20, 1997). In addition, penalty and interest on the net tax refund overpayment (i.e., $25,000) would be calculated beginning the day after the overpayment was mailed (i.e., February 7, 1997) and ending on the day the amount is paid (i.e., April 20, 1997). In the event that the registrant filed the return for the period earlier (e.g., January 3, 1997), the interest and penalty would begin to accrue on the unremitted net tax in the same manner (i.e., February 1, 1997).

The Department acknowledges that voluntary compliance is an important part of any selfassessment system. Consequently, a policy of voluntary disclosure has been adopted to encourage registrants to come forward and report any deficiencies to the Department. Originally, in cases of voluntary disclosure, there would be no application of civil penalties for gross negligence or criminal prosecutions however the registrant would still be required to pay all amounts including penalty and interest provided for in subsection 280(1) of the ETA.

On November 28, 1996, in a press release issued by former National Revenue Minister Jane Stewart, an announcement was made concerning voluntary disclosure and a waiver of the 6% penalty for taxpayers who come forward to voluntarily correct any omissions in their GST/HST accounts. Persons who have sent returns to Revenue Canada with incomplete information and subsequently provide the missing information are eligible, among others, for a waiver of the 6% penalty. Under the authority of subsection 281.1(2) of the ETA, the Minister may waive or cancel penalties payable by a person under section 280 of the ETA.

On April 4, 1997, a memorandum was issued by the Director General of the Audit Directorate to all Tax Services offices clarifying the details of the Minister's announcement. The memorandum also made reference to the intention of the Department to issue a revised Information Circular and GST/HST memorandum on Voluntary Disclosure at a future date which would include the new information.

In the cases outlined above, the registrant has come forward voluntarily to correct the error for the specific reporting period. If the information has been verified as accurate and complete by Revenue Canada and the registrant was not doing so in response to an audit, investigation, or other enforcement action, the registrant may have made a voluntary disclosure. If this is the case, the 6% penalty would be waived under the authority of subsection 281.1(2) of the ETA. Further information with respect to whether a disclosure is considered to be voluntary for GST/HST purposes may be obtained from Mr. John Fennelly, AChief, Program Management and Operations Section, VECR. Mr. Fennelly may be reached at (613) 2153.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 8806.

NCS Subject Code(s)              1638

Internal Memorandum:           Voluntary Disclosure
Small and Medium Enterprises Division, Audit Directorate
April 4, 1997

Ministerial Press Release:       Voluntary Disclosure
November 28, 1996 XXXXX