Statute of limitations

By now, your clients should have received their 2010 Notices of Assessment. If they feel they were unjustly charged arrears interest on income taxes owing or even penalties, they have the option of applying to the Canada Revenue Agency (CRA) under the “fairness” provisions for some relief.

In 1991, the federal government introduced fairness legislation, this legislation gives the CRA the discretion to cancel or waive either all or a portion of any interest or penalties (but not the actual tax) payable. Here are more details about the legislation and its history.

For the fairness provisions to apply, the penalties and interest must have generally resulted from circumstances beyond a taxpayer’s control.

The CRA has provided some examples of extraordinary circumstances that may result in an individual failing to make an appropriate payment when required or file a return when due, which include:

• natural disasters such as a flood or fire;
• civil disturbances or disruptions, such as a postal strike;
• a serious illness or accident;
• serious emotional or mental distress such as a death in the family.

Governmental errors can also lead to the waiver of interest and penalties that arose primarily due to CRA action, such as cases where a taxpayer relied on a CRA publication that contained errors, was given incorrect CRA advice, or a processing error.

Request for relief

As I’ve previously stated, a request for relief under the fairness rules must be made in writing by sending a letter to the CRA including the taxpayer’s name, address and social insurance number, the tax years involved, any relevant receipts and the reasons why any interest or penalties charged were primarily caused by factors beyond the taxpayer’s control.

The original fairness rules stated taxpayers could go back to 1985. The rules were amended in the 2004 federal budget to a 10-year limitation period for applications under the CRA’s fairness program. The government explained administrative problems could arise in trying to verify claims made for tax years going as far back as 1985.

As a result, for requests or income tax returns filed on or after January 1, 2005, the CRA’s discretion can only be exercised for fairness requests for the 10 previous taxation years.

If the request for relief is initially turned down by the CRA, the taxpayer can request, in writing, that the director of the tax centre or district office review the case.

If the request is turned down a second time, a taxpayer can then apply to the Federal Court for a judicial review. While the Federal Court does not have the discretion to directly reverse the CRA’s decision, it will determine whether, in the court’s opinion, the CRA “exercised its discretion in a reasonable and fair manner.”

If the court finds the CRA did not properly exercise such discretion, it will refer the request once again back to the CRA for reconsideration. If the Federal Court finds CRA did exercise its discretion appropriately and the taxpayer still disagrees, she can take her case one level higher to the Federal Court of Appeal for a review of the Federal Court’s decision.

Bozzer v The Queen

Sound like a long process? It’s what Ronnie Bozzer endured as he wound his way through the system, ultimately finding himself before a three-judge panel of the Federal Court of Appeal in Vancouver last December (Bozzer v The Queen et al, 2011 FCA 186).

The issue in Bozzer’s case was how to measure the 10-year period limitation. In December 2005, Bozzer applied to the CRA for interest relief on tax amounts owing for 1989 and 1990.

The CRA denied Bozzer’s request, saying the 10 years expired on December 31, 1999 for the 1989 taxation year and December 31, 2000 for the 1990 taxation year. Bozzer then applied to the CRA for a second-level review, which was denied for the same reason.

Bozzer subsequently turned to the courts for relief, first appearing in Federal Court requesting a judicial review of the CRA’s decision not to waive his interest. The Federal Court judge dismissed the application, finding “the time limit […] is for the 10 calendar years after the relevant taxation year, namely the year of assessment.”

While Bozzer argued his own case in Federal Court, he was represented in the higher appellate court by tax litigator David Spiro from Fraser Milner Casgrain LLP. “[CRA’s] narrow and restrictive interpretation of the provision never made much sense to me,” said Spiro.

Instead, Spiro argued it was irrelevant that Bozzer’s tax debt arose in 1989 and 1990. He was simply requesting interest relief for the 10 years prior to his application, which was made in December 2005. He felt the 10-year limit covered the interest that accrued from January 1, 1995 to December 31, 2004, and was not related to the years the tax debt arose.

The Federal Court of Appeal agreed. In a decision released in June, it concluded the 10-year period does not start in the year of assessment, but rather applies to interest accrued for the 10 calendar years prior to the date of the relief application. As a result, the court referred the matter back to the CRA for reconsideration.

“The court recognized that this particular provision was intended to help taxpayers obtain interest relief, not close the door on them,” said Spiro.

Jamie Golombek, CA, CPA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto. Jamie.Golombek@cibc.com