Taxpayer relief and financial hardship

September 7, 2012

With the economic downturn, many individuals and enterprises are carrying major tax liabilities, typically with hefty penalty and interest charges. Oftentimes, if a taxpayer can pay any money, it will be applied to the interest and penalties only. That means their tax owing will never go down and they will be forever in debt for the rest of their lives! Fortunately, the Income Tax Act (the “Act”) contains provisions that allow taxpayers to apply for relief from penalty and interest charges.

Pursuant to s. 220(3.1) of the Act, Canada Revenue Agency (CRA) has the ability to waive penalties and interest. Other provisions of the Act allow the CRA to accept late-filed, amended or revoked income tax elections, and to provide income tax refunds beyond the 3-year period normally allowed.

Before granting the relief, the CRA must satisfy that certain conditions are met. Typically, these conditions relate to (a) extraordinary circumstances; (b) actions of the CRA; and (c) inability to pay or financial hardship.

Financial Hardship

Financial hardship can generally be understood as inability to pay. For example, if the payment of accumulated interest would cause a taxpayer prolonged inability to meet basic necessities such as food, medical help, transportation or shelter, relief may be granted. For businesses, the CRA will always consider the possibility whether the tax liabilities will make an enterprise bankrupt. If a business has to cut back operation and fire employees to meet the interest payment, the CRA should at least seriously consider granting the relief.

To demonstrate financial hardship, the taxpayer should provide an Income, Expense, Asset, and Liability statement detailing their financial status. Before relief is granted under this ground, the CRA expects taxpayers to borrow to the maximum of their ability to meet a tax obligation. If taxpayers still have assets that could be liquidated to pay a tax debt, submitting a financial hardship application will most likely not be successful.

Generally financial hardship will only be considered when collection of an account has been suspended. Relief in the form of a waiver of currently accruing interest may also be granted when a taxpayer’s demonstrated ability to pay requires an extended payment arrangement. Where waiver of ongoing interest is granted, relief would be extended from the point at which a payment plan begins, as long as the agreed upon payments are made on time and in compliance with the Act.

There are also limitations for relief based on financial hardship. Relief of penalty amounts is not generally given unless there are extraordinary circumstances that, for example, have prevented or limited the taxpayer’s ability to file tax returns on time.

10 year limitation period

The CRA may grant relief for any tax year (or fiscal period in the case of a partnership) that ended within 10 years before the calendar year in which the taxpayer’s request or income tax return is filed. In its decision Bozzer v. Canada issued in June 2011, the Federal Court of Appeal ruled that the taxpayer relief provisions can apply to reduce interest and penalties which have accumulated in the 10 taxation years preceding the request for leniency, even if the tax debt causing the interest arose prior to that period.  Thus, even if a tax debt arose from the 1997 tax year, penalties and interest that have accumulated from 2002 to 2011 may still be reduced as a result of a 2012 request for leniency.

Final words

The above only illustrates some bolts and nuts of the taxpayer relief program. In practice, a lot of detailed facts and arguments are required. There are also some preconditions for filing the taxpayer relief request: all tax returns must be filed up to date and a payment arrangement must be in place to reduce or eliminate the outstanding balance. For this the taxpayer should consult an experienced tax professional in preparing such a request.  In case of refusal, a well-prepared application will serve a solid ground for judicial review of the CRA’s decision.

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