The CRA recently announced a new pilot project allowing CRA appeals officers to consider applications for interest and penalty relief concurrently with notices of objection. This initiative may benefit both taxpayers and the CRA’s administration of tax disputes.
Previously, the CRA’s policy was to hold taxpayer relief applications in abeyance until the substantive issues raised in a notice of objection had been considered and decided. Richard Montroy (Deputy Assistant Commissioner, Compliance Programs Branch of the CRA) indicated at the 2011 Canadian Tax Foundation national conference that this policy was under review and the CRA confirmed in November 2013 that the pilot project is now underway.
For taxpayers, the most important factor in settling a tax dispute is the bottom line amount payable, including interest and penalties. It militates against achieving a timely and mutually acceptable settlement of a tax dispute when significant accrued interest or penalty amounts remain in issue after the substantive tax issues are resolved. While discretionary penalties may be readily dealt with by CRA appeals officers while considering notices of objection, in certain situations a non-discretionary penalty and arrears interest might be partially or fully cancelled pursuant to ss. 220(3.1) of the Income Tax Act (Canada) (“ITA”). This could arise where the mechanical application of fixed, formulaic penalties is not commensurate with the impugned activity, or in situations including taxpayer hardship, extraordinary circumstances or third-party errors.
Allowing CRA appeals officers adjudicating substantive tax issues under objection to concurrently grant taxpayer relief recognizes the economic reality of taxpayers’ decision-making processes and may avoid artificially segregating the administration of tax disputes into discrete components. This approach may also reduce the CRA’s workload, since the taxpayer relief application would otherwise be considered separately by CRA officers otherwise unfamiliar with the taxpayer and underlying issues.
Certain potential procedural difficulties may arise under the new program. For example, a taxpayer cannot file a notice of objection to a reassessment issued pursuant to a taxpayer relief application (ss. 165(1.2) of the ITA). Moreover, decisions on taxpayer relief applications are challenged by application for judicial review before the Federal Court, whereas the procedural route for disputing the CRA’s decision on a notice of objection is by appeal to the Tax Court of Canada.
It is unclear whether separate notices of reassessment would need to be issued – one for the substantive decision on the notice of objection and another for the taxpayer relief decision. It is also unclear whether penalties and interest would be excluded from the reassessment arising from the substantive decision, or included and then cancelled by a further reassessment. Perhaps the CRA may require taxpayers to waive their further appeal and application rights as part of any negotiated settlement that includes interest or penalty relief, so that a single, conclusive and unchallengeable notice of reassessment can be issued.
Assuming any procedural issues are ironed out, allowing CRA appeals officers to waive or cancel interest and penalties concurrently with considering notices of objection is a welcome development.