The Canada Revenue Agency (CRA) has recently published a revised version of its GST/HST Memorandum 16.3.1, entitled Reduction of Penalty and Interest in Wash Transaction Situations. This new version of the memorandum sets out the administrative guidelines for the reduction of interest where a voluntary disclosure involving a wash transaction1 has been made. The memorandum essentially addresses the uncertainty surrounding the elimination of the 6% penalty for amounts owing after March 31, 2007. Indeed, for the last three years, many tax practitioners underlined that the tax authorities' refusal to waive interest payable on a GST/HST liability voluntary disclosed would eventually lead to the "slow but eventual death of GST voluntary disclosures".2
Before April 1st, 2007, subsection 280(1) of the Excise Tax Act (the ETA) imposed a 6% penalty (in addition to interest at the prescribed rate) where a person failed to remit or pay an amount to the Receiver General when required by the ETA. As of April 1st, 2007, the 6% penalty no longer applies. Instead, an increased interest rate is applicable to amounts owing under the ETA (i.e. a basic commercial rate, revised quarterly, plus 4 percentage points).
For periods from 1991 through March 2007, in the context of a wash transaction where certain conditions were met, the CRA considered waiving and cancelling the penalty and interest that were in excess of 4% of the tax not properly collected. The 4% was considered a penalty payable in addition to the tax assessed. In the context of a voluntary disclosure involving a wash transaction, such "4% penalty" was simply waived by the CRA.
Our understanding is that for post-March 2007 periods, the CRA representatives in charge of the voluntary disclosure program simply refused to waive the 4% balance remaining for voluntary disclosures involving a wash transaction. The CRA essentially argued that its published position at that time (i.e. the former version of GST/HST Memorandum 16.3.1) was no longer applicable considering the amendment of section 280 of the ETA and the elimination of the 6% penalty. In fact, as a voluntary disclosure has to involve the application, or potential application, of a penalty, a taxpayer was technically not allowed to seek relief through the voluntary disclosure program in such circumstances.
For post-March 2007 periods, the revised version of the memorandum now makes it clear that where a voluntary disclosure involving a wash transaction has been made: (i) the voluntary disclosure is still a valid disclosure even though there may be no penalty applicable (where other standard requirements are met); and (ii) the newly applicable interest rate will be reduced to 0% of the amount of the transaction identified as a wash transaction.
As it was the case for pre-April 2007 periods, this clarification by the CRA again constitutes a true economical incentive for registrants to resort to the voluntary disclosure program where wash transactions are involved.