Subsection 220(3.1) of the Income Tax Act (Canada) grants the Canada Revenue Agency ("CRA") the discretion to waive or cancel penalties and interest. While this provision is the legislative authority for the CRA's taxpayer relief and voluntary disclosures programs, its scope and operation are broader than the relief those programs grant pursuant to the CRA's administrative guidelines. That said, administrative guidance is generally relied upon to ensure consistent results and to assist decision-makers in considering relevant factors, although slavish adherence to administrative policy constitutes an improper fettering of discretion.
The CRA's administrative policy regarding taxpayer relief while notices of objection or appeals are pending includes certain limitations. More specifically, the CRA will review and consider relief requests on the bases of extraordinary circumstances or CRA actions while objections or appeals are in progress, and may communicate an intended relief decision informally, with a formal and final decision being rendered once the objections or appeals have been resolved or appeal rights have expired. By way of comparison, the CRA will hold off on communicating its decision concerning a request to waive or cancel penalties and interest based on inability to pay / financial hardship until the objections or appeals have run their course. The practical implication of this policy is that taxpayers will not know with certainty (or at all) the total amounts payable when they are seeking to settle an objection or appeal with the CRA.
From a taxpayer perspective, the CRA's approach may artificially segregate the administration of tax disputes into discrete components, ignoring the economic reality that taxpayers primarily care about the total amount payable. This has been a known problem for some time, having been discussed at the 2011 Canadian Tax Foundation conference amongst current and former senior CRA officials. Subsequently, in 2013, the CRA announced a pilot project allowing a CRA appeals officer to consider relief from interest and penalties at an objection stage, but little is known about the results of that project.
On a recent judicial review application, the Federal Court ("Court") found that the decision of a CRA appeals officer not to grant taxpayer relief for the purposes of settling an objection was reasonable. The case confirms that:
- the CRA may reasonably refuse to entertain contemporaneously with objections or appeals taxpayer relief requests based on inability to pay or financial hardship; and
- taxpayer relief requests should be express and supported with documents and information.
This article discusses the background facts, the main points in the Court's reasoning for its decision and finally some conclusions.
The taxpayer, Mr. Asare, sought a negotiated settlement of objections with the CRA in relation to reassessments of his personal and corporate income tax returns. In a counteroffer, the CRA appeals officer proposed to vacate the gross negligence penalties ("GNP") under subsection 163(2) that were imposed on Mr. Asare's corporation, but refused to vacate the GNP on Mr. Asare personally. As a condition to accept the counteroffer, Mr. Asare asked the CRA to waive or cancel the GNP against him personally, admitting that while he may have been liable under subsection 163(2), the assessment of such penalties "put the amount required to be paid beyond his reach". The taxpayer advised the CRA that, in his view, CRA appeals officers have delegated authority to grant relief under subsection 220(3.1), and he sent case law and CRA policy documents in support of his position. The CRA appeals officer refused to vacate the GNP. The taxpayer then applied for a judicial review of that decision, claiming that the appeals officer had a duty to exercise her discretion and that she fettered her discretion under subsection 220(3.1).
Distinction between two processes
In deciding whether the CRA appeals officer was required to exercise her discretion under subsection 220(3.1), the Court considered the distinction between the process for assessing whether a GNP was appropriate and the process for evaluating taxpayer relief. In a letter from the CRA appeals officer to Mr. Asare, Mr. Asare was advised of the distinction between the two processes and that it was not the role of an appeals officer to determine whether to grant taxpayer relief while considering the merits of an objection. In refusing relief at the objection stage after deciding that the GNP was appropriate on the merits of the case, the appeals officer advised Mr. Asare of the option to separately apply for taxpayer relief.
Citing Cayer v Canada Revenue Agency, the Court affirmed that the process for assessing whether a GNP was appropriate and the process for determining taxpayer relief were separate and distinct. Further, the Court noted that even if it was the role of the appeals officer to assess taxpayer relief, Mr. Asare did not request taxpayer relief or provide information to support his financial hardship. Whether that is an accurate statement may be doubtful, since Mr. Asare did allude to an inability to pay when communicating with the CRA appeals officer, and then supplied the CRA with authorities concerning taxpayer relief. One might reasonably wonder if the appeals officer should have rendered assistance to Mr. Asare, by referring the matter to a taxpayer relief officer, so that a file could have been opened and the separate process initiated, albeit put in abeyance until the substantive merits of the GNP were determined.
The fact that Mr. Asare supposedly did not request taxpayer relief distinguished this case from the Cayer case. Mr. Asare relied on the Cayer case as an authority where the CRA's refusal to exercise jurisdiction under subsection 220(3.1) was found. In Asare, the Court noted that the taxpayer in Cayer made a fairness relief request on the grounds of her financial situation and emotional distress, and that she supported the application with information, unlike Mr. Asare.
CRA's right to control own procedure
In reviewing the CRA appeals officer's decision, the Court acknowledged the CRA's right to control its own procedure as long as it was procedurally fair. Specifically, Information Circular IC07-1R1, which established the CRA's procedure on taxpayer relief provisions, explicitly noted that a request to cancel penalties based on inability to pay for financial hardship under subsection 220(3.1) would generally be put on hold until the outcome of the objection was determined. Therefore, the Court found that, even if there had been a request for taxpayer relief, the appeals officer did not have a duty to exercise any discretion to decide on the relief before Mr. Asare's liability was determined.
Given the above analysis, the Court concluded that the judicial review application was premature and that the appeals officer did not have a duty to assess at the objection stage whether taxpayer relief was appropriate. This case reminds us that the CRA applies a limited approach to taxpayer relief and objections and appeals. A CRA appeals officer may feel empowered to proactively grant interest relief in connection with CRA delay, may give an initial and informal position where extraordinary circumstances or CRA actions are involved, and will continue to defer requests for relief based on inability to pay / financial hardship until the objection or appeal is determined or appeal rights have expired.
The courts are and will likely continue to be deferential to the CRA's exercise of discretion, and arguing for a better and more appropriate scheme for relief through judicial review is probably going to fall on deaf ears. That said, and to be fair, as long as jurisdiction over tax matters remains bifurcated between the Tax Court of Canada and the Federal Court, the process for resolving tax disputes will remain challenging: where the determination of the substantive merits of an objection is convolved with taxpayer relief, the output will likely remain a single notice of reassessment, and then one might reasonably wonder how to go about challenging unfavourable results going to the merits of the assessment and the relief application, particularly if the issues overlap.
Should you have any specific questions about this article or would like to discuss it further, you can contact the author or a member of our Tax Dispute Resolution Group.
Xin Jiang co-authored this article during her time as an articling student in Gowling WLG's Toronto office.
 All statutory references in this article are to the Income Tax Act, RSC 1985, c 1 (5th Supp.).
 Canada Revenue Agency, Information Circular IC-07-1R1, "Taxpayer Relief Provisions" (August 18, 2017) at para 109.
 Richard Montroy et al, "Hot Audit Issues," in Report of Proceedings of the Sixty-Third Tax Conference, 2011 Conference Report (Toronto: Canadian Tax Foundation, 2012) 3:1-20 at 7.
 Asare v R, 2022 FC 1676 [Asare].
 2009 FC 1195 [Cayer].