Jaka Holdings Ltd. v. Canada Revenue Agency, 2011 DTC 5081 [at 5831], 2011 FC 518
Heneghan J. found that a decision from a second-level CRA review of the registrant's request to waive interest and penalties breached the registrant's procedural fairness rights, because it was substantially a copy of the first-level decision. As it was not clear what the result of an independent review would have been, the matter was referred back to be considered by a different CRA adjudicator.
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|Tax Topics - Income Tax Act - Section 220 - Subsection 220(3.1)||64|
Vitellaro v. Canada (Customs and Revenue Agency), 2004 DTC 6362, 2004 FC 561
Before finding that a decision of the Minister not to waive interest and penalties on unpaid GST and income tax of the taxpayers did not breach a standard of patent unreasonableness, Vaughan Finckenstein J. rejected a submission "that it would be unfair to assume that they have to mortgage or sell their house in order to pay interest and penalties on their tax debt" (p. 6365).
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|Tax Topics - Income Tax Act - Section 220 - Subsection 220(3.1)||65|
1092072 Ontario Inc. (carrying on business as Elfe Juvenile Products) v. ARQ, 2017 QCCS 5369
The appellant (“Elfe”) had been advised by its auditors (MNP) that it was not required to charge QST on supplies by it to another company having the same joint ownership as a result of a joint election that was available to them. The ARQ assessed Elfe for failure to collect and remit tax on such supplies but, given that the other company was entitled to full credits for such tax, limited its assessment of interest to the 4% limitation set out in its Interpretation Bulletin applicable to wash-trading transactions (LMR. 94.1-1/R7, at para. 24).
The ARQ then denied Elfe’s request for cancellation of this interest, noting that it would be inequitable to treat Elfe’s file differently than others.
Before annulling this decision of the ARQ and returning the file to the ARQ for a fresh decision, Moore JCS stated (at paras. 28-29, 31-35, TaxInterpretations translation):
Section 94.1 of the Tax Administration Act gives the Agency broad discretion and allows it to cancel up to 100% of the interest charged on late payment of amounts owing: "The Minister may … cancel, in whole or in part, any interest, penalty or charge exigible under a fiscal law.”
On the other hand, the Interpretation Bulletin, written to guide the exercise of the discretion described in section 94.1, only provides for the cancellation of a portion of the interest charged in the context of a wash transaction. …
The second page of the Agency's August 17, 2015 letter reads:
"Revenu Québec acknowledges that [the associated corporation] could have claimed inputs earlier if it had been invoiced at the right time and that no loss to Revenu Québec resulted. That is why we waived, when issuing notices of assessment, interest exceeding the 4%. rate [...]
[…] The interest limited to 4% imposed on you is applicable to this type of transaction for all mandataries. ... It would ... be inequitable to treat your file differently."
These two paragraphs clearly show that the Agency felt unable to cancel more than the interest portion indicated in paragraph 24 of the Interpretation Bulletin of 4% of the uncollected sales tax.
Based on the Interpretation Bulletin, the Agency has placed itself at odds with this direction from Stemijon: "A policy can help or guide the exercise of discretion under a statute, but it cannot compulsorily dictate how this discretion is exercised."
The Agency did not consider the possibility of limiting the interest to 3%, 2% or 1% of the uncollected sales tax, or of cancelling it completely, as authorized by section 94.1 of the Tax Administration Act.
This decision is not an acceptable outcome that can be justified on the facts and the law and is unreasonable. The Court annuls that decision.
In also rejecting Elfe’s submission that the Court should simply annul the interest itself, he noted that the ARQ had not even considered whether it was appropriate in the particular circumstances to annul interest below the 4% level, and had not been informed of the MNP advice, and stated (at para. 40):
Given the breadth of issues that could be considered by the Agency and its jurisdiction in this matter, the Court will not exercise the discretionary power of the Agency.
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|Tax Topics - Income Tax Act - Section 220 - Subsection 220(3.1)||the rigid GST/QST policy of not cancelling interest below 4% on wash transactions is unlawful||187|
Deferral of GST/HST Tax Remittances (COVID-19 Measures) 31 March 2020 CRA Webpage
Q.1 Deferral of remittances (and no penalty for late-filing returns)
The CRA will allow all businesses to defer, until the end of June 2020, any GST/HST payments or remittances that become owing on or after March 27, 2020, and before June 2020. This means that no interest will apply … .
The deadline for businesses to file their returns is unchanged. … However … the CRA won’t impose penalties where a return is filed late provided that it is filed by June 30th.
Q.2 Deferral of quarterly instalments
[A]ny GST/HST instalment payments due on or after March 27, 2020, and before June 2020 can be deferred until the end of June 2020.
Q.3 Deferral for individual annual filer with April 30 remittance due date
[T]he remittance of your net tax can be deferred until the end of June 2020.
Q.4 No automatic deferral for excise duties
Excise taxes and duties are still required to be remitted by their prescribed due dates. … Decisions to waive interest are made on a case by case basis.
Q.5 Potentially immediate processing of electronic returns
GST/HST returns that are filed electronically will be processed unless they require client contact or additional review.
Q.6 No processing of paper returns
Paper copies of GST/HST returns will not be processed until normal operations resume.
Q.7 Electronic processing of refund claims
GST/HST returns filed electronically that do not require client contact or additional review will be processed and a refund will be issued if there is no balance owing. Registrants should sign up for Direct Deposit through My Business Account in order to receive their refunds.
Q.9 No payment of housing/general rebate rebate claims
Only the GST/HST rebate applications filed electronically for … Point-of-Sale and Public service bodies with the CRA can be processed automatically unless they require client contact or additional review. Electronically filed Housing and General rebate applications are manually assessed and won’t be processed until operations resume.
Q.11 Consideration of late-filed rebate claims
GST/HST rebates that are late filed may be considered for processing. They will be reviewed on a case by case basis when operations resume.
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|Tax Topics - Excise Tax Act - Section 280.1||no penalties for late-filing GST/HST returns on June 30, 2020||36|
CRA indicated, respecting its GST/HST Registry, that “they have resolved the issue of false positives that occurred in some instances.” CRA went on to indicate that the “CRA does not currently have a specific policy to waive penalty and interest in cases where a supplier of real property relied on the GST/HST registry to verify a recipient’s GST/HST registration status and the GST/HST registry gave a false positive.”
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|Tax Topics - Excise Tax Act - Section 221 - Subsection 221(2)||vendor can rely on inquiries with purchaser||239|
Memorandum 16-3-1, para. 4 lists municipalities, which are eligible for 100% GST rebates, as entities that cannot be considered to have received a wash transaction. What is the rationale? CRA responded:
A review of the wash transaction policy was undertaken before Memorandum 16-3-1 was updated in 2010. ...
The outcome of the review was to maintain the original tax policy intent of the wash transaction policy whereby it would continue to only possibly apply for recipients involved in commercial activities and entitled to claim full ITCs. The wash transaction policy was not intended to apply to all circumstances where there is no net loss of revenues for the government.
… Municipalities in participating provinces may be entitled to a PSB rebate of 100% of the federal part of the HST but only entitled to a lesser percentage of the provincial part of the HST.
ABC Drilling and ABC Mining (closely-related corporations involved exclusively in commercial activity) receive invoices in proper form from a consultant for $100,000 (plus 13% HST) and $50,000 (plus 13% HST), respectively, but due to a mix-up, each claims an input tax credit based on the other’s invoice.
- Upon discovering this on audit, how would CRA assess ABC Mining respecting this issue for that monthly period?
- Does the Wash Transaction Policy result in the waiver/cancellation of interest in excess of 4% of the ITCs disallowed ($13,000), or 4% of the difference in net tax ($6,500)?
- The examiner or auditor would assess $6,500 as over-claimed ITCs. They would then flag this amount as the “wash base amount”. The amount of interest waived or cancelled would be based upon this particular amount.
- The system automatically calculates the amount of penalty/interest based upon the wash base amount identified by Audit. The system will compare the 4% flat calculation on the wash base amount to the statutory interest/penalty calculation on that same wash base amount. It will then apply the lower of the two.
- If the 4% is less than the statutory penalty/interest amount, we will use the 4% amount and post that amount to the period.
- If the 4% is greater than the statutory penalty/interest amount, we will ignore the 4% and post the statutory penalty/interest amount.
CBAO National Commodity Tax, Customs and Trade Section – 2013 GST/HST Questions for Revenue Canada, Q. 34
As s. 186(1) only applies for ITC purposes, it does not affect the determination of whether there is an imported taxable supply. However, where a registrant failed to account for HST on an imported taxable supply which should have been self-assessed and has not claimed an ITC for those amounts, administrative tolerance generally will be exercised so that no interest is assessed.
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|Tax Topics - Excise Tax Act - Section 186 - Subsection 186(1)||failure to self-assess under s. 218 where satisfy s. 186(1)||61|
|Tax Topics - Excise Tax Act - Section 217 - Imported Taxable Supply||failure to self-assess under s. 218 where satisfy s. 186(1)||61|
GST/HST Memorandum 16.3.1 “Reduction of Penalty and Interest in Wash Transaction Situations” April 2010
Meaning of wash transaction
1. A wash transaction occurs when a taxable supply (other than a supply taxable at 0%) is made and the supplier has not remitted an amount of net tax by virtue of not having correctly charged and collected the tax from the recipient who is a registrant who would have been entitled to claim a full input tax credit (ITC) if the tax had been applied correctly.
Conditions to be met
22. The CRA will consider waiving or cancelling the portion of the interest that is in excess of 4% of the tax not properly collected in a wash transaction where the following conditions are satisfied:
- it must be demonstrated that the taxable supply in question was made to a registrant who would have been entitled to a full ITC if the tax had been properly applied, or to a federal department, or to a participating provincial government entity; or where an ITC is claimed by the wrong member of closely related group, or an associated person, it must be demonstrated that the person properly entitled to claim the ITC is a registrant that would have been entitled to a full;
- the person being assessed must not have been previously assessed for the same mistake and must have a satisfactory history of voluntary compliance;
- the person being assessed must have remedied the situation to ensure that tax is collected and ITCs properly claimed on future supplies of a similar nature; and
- the person being assessed must not have been negligent or careless in the conduct of its affairs in ensuring that tax is properly collected and remitted on its taxable supplies and that it claimed ITCs only where properly entitled to do so.
25. The waiver of interest in excess of 4% of the tax not properly charged in a wash transaction will normally be considered automatically by the CRA during the audit process.
Technical Information Bulletin B-074, November 28, 1994, "Guidelines for the Reduction of Penalty and Interest in a Single 'Wash Transaction' Situation"
Ryan Rabinovitch, Angelo Discepola, "Solving Sales Tax Non-compliance Through the Canadian Voluntary Disclosure Program"
Voluntary disclosure for series of GST returns only one of which is more than one-year overdue (p. 1176)
[T]he disclosure must generally include information that is at least one year late. The purpose of this condition is to prevent the use of the VDP by registrants to avoid late-filing penalties. However, the disclosure may include information that is less than one year late where the disclosure is to correct a previously filed return.
There is another important exception that can apply in the GST context: where returns for multiple reporting periods have not been filed, and any one of the outstanding returns is more than one year past due, the entire series of returns can be eligible for the VDP. [fn 7: 1C 00-1R4…at paragraph 49.] Accordingly, where a registrant is a monthly filer, returns for an entire year can be part of a disclosure if any one of them is one year late.
CRA practice to go back only to years for which there is supporting documentation (p. 1177)
To the extent that a disclosure involves non-compliance that amounts to fraud or a misrepresentation that is attributable to a registrant's neglect, carelessness or wilful default, the CRA could choose to include each of the registrant's historical reporting periods in the disclosure. In practice, however, the CRA will (by administrative largesse) only include reporting periods for which supporting documentation is available in the disclosure. While at first blush this may seem generous, to the extent supporting documentation is available for periods beyond the ten-year period from the period within which relief is requested, the CRA will be precluded. by the wording of section 281.1 of the ETA from providing relief in respect of the interest or penalties that accrued beyond that ten-year period.
Accordingly, registrants who have failed to comply with the ETA in cases involving neglect, carelessness, wilful default or fraud may not be entitled to relief from interest and penalties for certain periods covered by their disclosure. That said, provided a disclosure does not involve such circumstances, the CRA will limit the period covered by the disclosure to four years, which is generally the case for disclosures involving wash transactions….
Length of VDP process (p. 1177)
[T]he disclosure process will likely take anywhere from nine to twelve months to complete.
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|Tax Topics - Income Tax Act - Section 220 - Subsection 220(3.1)||CRA’s voluntary disclosure practice is to go back only to years for which there is supporting documentation, and no earlier||39|
Conditions for the making of a voluntary disclosure include that it is “complete;” and that there is “payment of the estimated tax owing”.
(a) To the extent the taxpayer uncovers errors that are wash transactions (i.e., the wrong entity in a corporate group claimed ITCs) worth over 90% of the claim, and also minor calculation or other errors, will the CRA treat the disclosure as Category 1 for the entire disclosure, only for the portion that is a wash transaction, or will the disclosure instead be treated as Category 2 or 3 because it is not exclusively a “wash transaction” type error? CRA responded:
When there is additional information disclosed that does not represent a true wash transaction, provided there is no indication of tax avoidance, deliberate or wilful default, or carelessness amounting to gross negligence, the application may be split between Category 1 and the other two categories. If there is evidence of deliberate or wilful default, gross negligence or tax avoidance then the VDP application as a whole will fall under Category 3. … In this case, the CRA would treat 90% of the claim under Category 1 and the other 10% would likely fall under Category 2.
(b) Where the taxpayer is applying under Category 1 or 2, and for these categories the application is “complete” for the 4 calendar years before the date of the application, does this mean that an applicant satisfies the conditions for completeness and payment where documentation and payment is made for the past 4 years (even if the error was made for more than 4 years prior to filing)? CRA responded:
VDP applicants are required to submit information for the 4 calendar years before the date the application is filed for applications processed under Category 1 or Category 2 … [and] would only be expected to include information and payment of the estimated tax owing for 4 calendar years before the date the application is filed even if the error was made for more than the 4 calendar years prior to the date of filing.
… If an application that was believed to fall under Category 1 (GST/HST wash transaction) or Category 2 (General program) is reclassified, in part or in whole to Category 3 (Limited program) by the CRA, the applicant will be required … to pay the additional taxes … .
GST/HST Memorandum 16-5, paras. 44 and 45 provide that a registrant may participate in preliminary discussions on an anonymous basis with a CRA official. When asked for particulars, CRA stated:
(a) The Shawinigan National Verification and Collections Centre (NVCC) has multiple VDP officers who have been trained and are able to conduct pre-disclosure discussions. The NVCC is able to assign additional VDP officers as necessary to assist with pre-disclosure discussions in response to call volumes. Depending on the complexity of the situations, as well as the availability of the applicant and of the VDP officer, it is recognized that it may take several contacts in some situations to fully conclude a pre-disclosure discussion.
(b) To initiate a pre-disclosure discussion with a VDP officer, an applicant (or their representative) must first contact Business Enquiries at 1-800-959-5525. Business Enquiries will refer the contact information provided by the applicant or their representative to a VDP officer who will initiate a call back to the applicant.
… [T]the NVCC is currently responding to requests for call-backs promptly. While we are not aware of any call-backs or discussions that have taken weeks or months to conclude, we will monitor the situation and consider making improvements if needed.
Assume that a GST/HST registered recipient (Aco) is charged tax, five years after the transaction in question, by another GST/HST registrant (Sco) who has now been assessed by CRA for failure to charge GST/HST respecting of a supply of goods to Aco. Sco provides Aco with a copy of the Notice of Assessment so that Aco can claim an ITC for the GST/HST now charged to it by Sco. This causes Aco to realize that it, in turn, had failed to charge GST/HST on reselling the same goods to its customers (who acquired exclusively for commercial use) as a result of an interpretation of s. 144 that was contrary to a published CRA position.
(a) Can Aco now make a voluntary disclosure in light of para. 30 of GST/HST Memorandum 16-5, which indicates that a VDP application will not be considered voluntary if, “enforcement action … relating to the subject matter of the VDP application has been initiated … against a third party, where the purpose and impact of the enforcement action against the third party are sufficiently related to the present application”?
[I]f Aco and Sco are not related, the application from Aco would likely be considered under VDP. Conversely, if Aco and Sco are related companies, Aco’s application would not be considered as voluntary due to the prior enforcement action (audit) that was conducted against Sco that identified the subject matter of Aco’s VDP application.
(b) What is CRA’s interpretation of the “sufficiently related” test?
In general, the CRA will consider situations where the enforcement action provided sufficient information to identify the VDP applicant and to uncover signs of collusion between the third party and the VDP applicant or wilful blindness on the part of the VDP applicant to fall within the meaning of the aforementioned phrase. An example of such situations would be enforcement actions against a third party that deal with accommodation (also known as “invoices of convenience”) or false invoices where the VDP applicant is identified as a participant in the invoicing scheme.
(c) Assume that that voluntary disclosure is accepted, and that Aco is a large corporation with over $250 million in gross revenues in the last two years. Will Aco be precluded from filing a Notice of Objection to challenge the legal validity of the CRA’s policy on s. 144?
As per … Memorandum 16-5 [para. 77], the applicant will be required to waive their rights to object to the assessment results in regards to the specific information submitted in the VDP application. However, the applicant is allowed to file a Notice of Objection in case of disagreement with respect to characterization issues, such as whether a supply is a taxable or exempt supply, or whether a particular supply is deemed to be made inside or outside Canada as a result of the application of the place of supply rule in section 144 … .
In GST/HST wash transactions where the recipient is entitled to full ITCs, how much estimated tax would be required where the non-compliance related to a period longer than 4 years? We note that estimated tax for only 4 years is required where the disclosure is processed under the wash transaction (Category 1) or general program (Category 2). CRA responded:
As indicated … Memorandum 16-5 [para. 33] VDP applicants are required to submit information for the four calendar years before the date the application is filed for applications under Category 1 or Category 2. As a result, in these cases, the applicants would only be expected to include payment of the estimated tax owing for the same four-year period as their VDP applications.
In providing a statistical update on the post-April 1, 2018 GST/HST Voluntary Disclosures Program (VDP), CRA stated:
From March 1, 2018 to December 31, 2018, the CRA received 639 GST/HST VDP applications. Files under the new policy are still very much at the reviewing stage since the program is completing the processing of disclosures received before March 1, 2018 first. As such, it is too early for the program to calculate the percentage of applications treated under each category.
CRA received a total of 347 requests for pre-disclosure discussions related to both Income Tax Act and Excise Tax Act matters between March and December 2018.
This memorandum applies to Voluntary Disclosures Program applications received on or after March 1, 2018… .
Tracks for disclosure
9. Effective March 1, 2018, VDP applications relating to GST/HST, excise tax, excise duty, softwood lumber products export charge and air travellers security charge may fall under three separate categories:
- Category 1 (Wash Transactions),
- Category 2 (General Program), and
- Category 3 (Limited Program).
Track 1 – GST/HST wash transactions
12. Category 1 specifically provides relief for applications involving GST/HST wash transactions that are eligible for a reduction of penalty and interest under the policy set out in GST/HST Memorandum 16-3-1, Reduction of Penalty and Interest in Wash Transaction Situations. …
Track 2 – General program
13. In general terms, Category 2 provides relief for applications disclosing non-compliance or errors including, but not limited to, situations involving:
- GST/HST wash transactions that are not eligible for a reduction of penalty and interest under the policy set out in GST/HST Memorandum 16-3-1 (for examples of non-eligible wash transactions, please see the memorandum);
- reasonable errors;
- failure to file information returns;
- no gross negligence or deliberate avoidance of tax; or
- over-claimed rebates.
14. For example, in January 2017, while preparing its financial statements for the year ended December 31, 2016 a registrant discovers that due to an accounting error, its GST/HST return for the quarterly reporting period ending June 30, 2016, overstated its input tax credits. The registrant had claimed input tax credits that it had already claimed in the previous reporting period. This would normally qualify under the General Program.
Track 3 – Limited program
15. In general terms, Category 3 provides limited relief for applications that disclose non-compliance where there is an element of intentional conduct on the part of the registrant or a closely related party including, but not limited to, situations where:
- GST/HST was charged or collected but not remitted;
- efforts were made to avoid detection (for example, participation in underground economy);
- the disclosure is made after an official CRA statement regarding its intended specific focus of compliance (for example, the launch of a compliance project or campaign) or following broad-based CRA correspondence (for example, a letter issued to registrants involved in a particular sector about a compliance issue);
- there had been deliberate or wilful default or carelessness amounting to gross negligence.
16. For example, a person making supplies of consulting services which are taxable at the rate of 13% charged and collected GST/HST on the taxable supplies, and although the person was aware of their obligations regarding the GST/HST, the person chose not to register for GST/HST and never remitted the GST/HST collected. This would normally qualify under the Limited Program.
17. Generally, applications by corporations with gross revenue in excess of $250 million in at least two of their last five taxation years, and any related entities, will be considered under the Limited Program.
18. Additionally, in all cases, the following factors may be considered when determining under which category a VDP application should be processed:
- the dollar amounts involved;
- the number of years of non-compliance;
- the sophistication of the registrant; and
- how quickly the registrant took corrective measures to address their non-compliance upon its discovery.
19. The existence of a situation or a single factor will not necessarily mean that a registrant is eligible only for the Limited Program. For example, a sophisticated registrant may still correct a reasonable error under the General Program.
Penalty and interest relief
20. If a VDP application is accepted as having met the conditions set out in paragraph 29, it will be considered a valid disclosure. The registrant may be eligible for relief from penalties as follows:
- for Categories 1 and 2, 100% penalty relief; and
- for Category 3, no gross negligence penalty will be applied even where the facts establish that the registrant is liable for such a penalty; however, other applicable penalties will still be applied.
21. Relief from penalties is subject to the limitation period explained in paragraph 24 below.
22. In addition to penalty relief, if a VDP application is accepted by the CRA, the registrant may be eligible for relief from the application of interest in respect of assessments resulting from the application as follows:
- for Category 1, 100% interest relief;
- for Category 2, 50% of the applicable interest will be relieved;
- for Category 3, none of the applicable interest will be relieved.
When not required to go back more than 4 or 6 years
33. A registrant’s VDP application must be made for tax years or fiscal or reporting periods where there was previously inaccurate, incomplete or unreported information regarding their tax affairs (including any non-arm’s length transactions and circumstances) as follows:
- for Categories 1 and 2, for the four calendar years before the date the application is filed; and
- for Category 3, for all relevant years.
Disclosure of advisor
47. Where a registrant received assistance from an advisor in respect of the subject matter of the VDP application, the name of that advisor should generally be included in the application.
Excise and GST/HST News - No. 102 July 2017
VDP announcement in Fall 2017
On June 9, 2017, the CRA launched a 60-day online consultation with Canadians about the CRA’s proposed changes to its Voluntary Disclosures Program. … It is expected that the CRA will announce formal changes to the program in the fall of 2017.
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|Tax Topics - Excise Tax Act - Section 229 - Subsection 229(2)||107|
|Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Financial Service - Paragraph (l)||145|