Canada Revenue Agency Relief Provisions and Amended Tax Election Forms
In 2007, Canada Revenue Agency (CRA) issued a comprehensive Information Circular IC 07-1 to advise tax-payers of when and how they can ask for relief from the normal collection, re-filing or refund provisions of the Income Tax Act.
Knowledge of these rules can be extremely helpful to taxpayers who owe or potentially owe significant amounts of money to CRA or are looking to obtain refunds that they are otherwise statute barred from receiving. The Circular deals with four main areas:
- Request for taxpayer relief - cancellation or waiver of interest and penalty charges.
- Filing a voluntary disclosure to eliminate penalties on unreported income.
- Obtaining refunds beyond the three-year limit normally allowed.
- Filing, amending or withdrawing special tax elections beyond permitted time limits.
The Minister does not have to grant relief in any of the above areas and each request will be reviewed by CRA and decided on its own merit. If CRA denies an adjustment, they will also provide the taxpayer with an explanation of the reasons for their decision. A second appeal to the local tax office is sometimes beneficial.
Time Allowed for Application
The Minister may grant relief for any tax year that ended within 10 years before the calendar year in which the taxpayer’s request is filed. Therefore, a taxpayer has 10 years from the end of the calendar year in which the tax year ended to make a request to the CRA for relief. This 10-year limitation period rolls forward every January 1. Relief from interest charges relating to tax matters that arose more than 10 years ago will not be allowed. Cancellation of interest refers to the elimination of interest already accrued, whereas a waiver of interest refers to cancellation of future interest charges.
Request for Taxpayer Relief
In determining whether to waive or cancel interest charges, CRA will consider a number of factors:
- Whether the taxpayer has a history of compliance,
- Whether the taxpayer knowingly allowed a balance to exist on which interest has accrued,
- Whether the taxpayer has exercised reasonable care and has not been negligent or careless in filing tax returns,
- Whether the taxpayer has acted quickly to remedy any delays or omissions.
Taxpayer relief for interest (and less often penalties) may be warranted in the situations outlined by CRA as follows:
- Extraordinary circumstances,
- Natural or man-made disaster,
- Death/accident/serious illness/emotional or mental distress,
- Civil disturbance,
- CRA actions,
- CRA error,
- CRA delay,
- Inability to pay, and
- Financial hardship / inability to pay.
The request for relief is normally applied for using form RC4288E, accompanied by a detailed supporting submission and backed up by appropriate documentation. A taxpayer can make this application based on any one or more than one of the situations.
Extraordinary circumstances apply for reasons beyond the taxpayer’s control. For example, the inability to file a tax return because of serious illness, accident or serious emotional or mental stress all qualify.
Actions caused by CRA would include such things as processing delays, undue delays in resolving an objection or appeal, or completing an audit. Errors in material available to the public from CRA or incorrect information provided to a taxpayer also qualify as a CRA action that cause interest to be payable.
The inability of a taxpayer to pay or financial hardship can involve several different situations. The Circular lists the following examples:
- Where a collection has been suspended due to an inability to pay;
- Where a taxpayer can show that the inability to pay requires an extended payment arrangement;
- When payment of accumulated interest would cause a prolonged inability to provide the basic needs of life such as food, medical assistance, transportation, shelter, etc.
As most people know, CRA operates a voluntary disclosure program that allows taxpayers to come forward and correct inaccurate information already filed with CRA or omitted. In such cases, taxpayers will have to pay the taxes owing plus arrears of interest but CRA will waive penalties and prosecution that might otherwise occur. CRA may also provide some relief on a case-by-case basis on interest arrears after the taxpayer has made the voluntary disclosure.
A voluntary disclosure is only valid where it has been made before a CRA review or other investigation is under way, which would include a simple request by CRA to file a tax return. Information Circular IC00-1R2 deals with voluntary disclosure in detail and this area will not be further dealt with in this article.
Taxpayers should understand that CRA has extraordinary powers to track down information that will disclose unreported income. For example, most of Canada’s tax treaties with other countries provide for an exchange of information between tax authorities and this process is being used more frequently.
The normal time to make a claim for a tax refund is three years from the date of the Notice of Assessment for the year or three years from the end of the year if a return was not filed. Often, taxpayers are unaware of this three year limitation and consequently refunds may not normally be available if notices of objection or returns have been filed more than three years late.
However, the Income Tax Act does grant the Minister discretionary authority to accept such late request if they are made within the 10-year period. Individuals can make such a request if they were not aware that they missed claiming a deduction or a refundable or non-refundable tax credit was not applied for on the original return.
Refund claims are often overlooked simply because a taxpayer has no tax payable and therefore does not file a tax return. Refundable tax credits, such as the child tax credit or GST credit, are payable to the taxpayer even with no tax payable so a return should always be filed. Non-refundable credits such as the disability tax are also overlooked. Ten years of disability tax credits not applied for amount to over $10,000.
In the case of corporations, there can be unclaimed balances due to taxpayers in accounts the CRA has closed because of inactivity.
Filing, Amending or Withdrawing Special Tax Elections
The Income Tax Act often allows taxpayers to make special elections to obtain an alternate tax treatment from the norm. For example, an election to defer income could make a transaction tax-free until later years. The Income Tax Act gives the Minister discretion to extend the statutory time for filing such elections or permit elections to be amended or revoked. These requests must still be made within the 10-year time period.
If a late filing election is accepted, a late filing penalty is imposed. Therefore, taxpayers need to consider if the benefit of the late file election exceeds the cost of the penalty and gives them a positive result. In many instances that will be the case.
CRA lists a number of situations in which late, amended or revoked elections are permitted:
- There have been tax consequences not intended by the taxpayer and the taxpayer took reasonable steps to comply with the law.
- The request arises from circumstances beyond the taxpayer's control.
- The taxpayer acted on incorrect information given by CRA.
- The request results from a mechanical error by the taxpayer.
- The taxpayer can show that they were not aware of the election provision even if they took a reasonable amount of care to comply with the law and took remedial action as quickly as possible.
Information Circular IC07-1 provides an extensive list of specific elections that can be filed late. There are too many to list here and advice should be sought if you think you missed an election. Some of the obvious ones are as follows:
- An election to capitalize interest cost instead of deducting it.
- An election to defer the income or capital gain when a replacement property is acquired for a property that was stolen, expropriated, destroyed or a former business property.
- An election to designate a property as a principal residence because there has been a change of use to an income producing property.
- An election to have a bad debt deemed to be disposed in the year and reacquired to permit a capital loss deduction.
- An election to have the tax-free rollover reserves on the transfer of property to a spouse or common-law partner do not apply.
- An election to allow the taxpayer to have a taxable dividend from a Canadian corporation by a spouse or common-law partner included in the taxpayer’s income.
- An election to have an excess capital dividend treated as a taxable dividend.
Space does not allow a detailed discussion of the above but be assured that any one of the elections could be beneficial to you in the right circumstances. Tax filings are best done with pre-planning but tax savings can also be there by filing or re-filing or withdrawing a late election.
The Information Circular allows a taxpayer to reduce the interest and penalties and obtain some very significant refunds retroactively, but the steps, procedures and forms to be filed can be sometimes complex and challenging.
It is strongly suggested that you obtain professional advice to enquire if you can benefit from the forgoing.
Canada Revenue Agency is usually very helpful in assisting with the steps and procedures, to a point. However, caution should be exercised and it is always strongly recommended that professional advice be obtained to ensure that all matters are thoroughly investigated and addressed before you commence the process.
If you have any questions, just call Joe Truscott, CA at 905 528 0234, Extension 224 or email me at email@example.com.
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