What is a Tax Remission Order?

The Canadian Income Tax Act includes provisions that are meticulously drafted and precisely structured to offer taxpayers a range of options for addressing their tax issues. Nevertheless, there are situations where the Income Tax Act may not offer taxpayers sufficient remedies, or where the strict application of its rules can lead to inequitable outcomes.

A tax remission order serves as a final recourse for taxpayers seeking relief from tax debt and enforced penalties, including interest, when all other means of taxpayer relief have been exhausted. According to subsection 23(2) of the Financial Administration Act, “the Governor in Council may […], remit any tax or penalty, including any interest paid or payable thereon, where the Governor in Council considers that the collection of the tax or the enforcement of the penalty is unreasonable or unjust, or that it is otherwise in the public interest to remit the tax or penalty.” However, because tax remission orders are discretionary, they are only granted in exceptional circumstances. If you have explored all available taxpayer relief options, it is highly advisable to seek guidance from one of our top Toronto tax lawyers certified taxation specialists regarding a potential application for a tax remission order.

What is the Process in Applying for a Tax Remission Order?

To initiate the process for a tax remission order, a taxpayer should commence by submitting an application to the Director of his or her respective Tax Service Office, formally requesting such an order. The director will then evaluate the request and provide either a favourable or unfavourable recommendation regarding the remission order. If the director supports the application for the tax remission order, it will be subsequently forwarded to the Headquarters Remission Committee located in Ottawa, which will conduct further assessments and provide additional recommendations. The formal decision regarding a taxpayer’s application for a tax remission order is ultimately made by the Assistant Commissioner of the Legislative Policy and Regulatory Affairs Branch at the Canada Revenue Agency (CRA). If the Assistant Commissioner’s decision is in the affirmative, it is then forwarded to the CRA’s Commissioner of Legislative Policy and Regulatory Affairs Branch. Should the Commissioner also approve the application, it is subsequently referred to the Minister of National Revenue for further recommendation. Subsequently, the application is recommended to the Governor in Council, who holds the ultimate authority to make the final decision.

What are the Guidelines for Applying for a Tax Remission Order?

An application for a tax remission order should provide a comprehensive overview of the taxpayer’s situation and elucidate why the payment of taxes and the enforcement of tax penalties, including interest, would be deemed unreasonable, unjust, or against the public interest, considering the unique circumstances of the taxpayer. Consequently, an application for a remission order will only be put forth to the Governor in Council after all other potential avenues for taxpayer relief have been thoroughly exhausted. This includes, but is not limited to, pursuing objections, appeals, and requesting taxpayer relief.

The CRA has formulated the following guidelines for decision-makers to employ when assessing whether or not to propose a remission order request in a particular case:

• Extreme hardship;
• Financial setback exacerbated by exceptional circumstances;
• The Legislation’s Unintended Consequences; and,
• Incorrect actions or advice provided by CRA officials.

Extreme Hardship

In the context of a tax remission order, “extreme hardship” pertains to the taxpayer’s income and resources, specifically whether they are adequate to settle the tax debt and associated penalties. To qualify for a tax remission order, the application must illustrate that meeting the tax obligations, penalties, or interest would result in extreme financial hardship for the taxpayer.

Financial Setback Exacerbated by Exceptional Circumstances

A recommendation for a tax remission order might be appropriate in situations where an additional tax debt would place significant strain on the taxpayer’s limited financial resources. Nevertheless, the courts generally consider a “financial setback” as less severe than “extreme hardship.” Financial setback involves assessing the importance of the tax liability amount for the taxpayer. To meet this guideline, a substantial financial setback must be evident along with at least one extenuating factor. The two primary extenuating factors are:

• Situations outside the taxpayer’s control; and,
• Errors made by the taxpayer.

Circumstances beyond a taxpayer’s control may encompass various situations, such as a string of illnesses, which could merit the consideration of a tax remission order. On the other hand, the mere fact that a taxpayer committed an error resulting in excessive tax liability does not inherently qualify as an extenuating factor. However, if substantial evidence reveals that the taxpayer’s error should have been identified and rectified by CRA officials, this could constitute an extenuating factor worthy of remission order consideration.

In the case of Mokrycke v. AGC, the taxpayer failed to meet the 90-day deadline for filing an objection with the CRA in response to reassessments for the 2005 and 2006 taxation years. Consequently, the CRA issued a Notification of Confirmation, affirming the reassessed amounts for the said years. The accompanying cover letter stated that if the taxpayer disagreed with the CRA’s decision, he could appeal to the Tax Court of Canada. However, the taxpayer also missed the 90-day deadline, starting from the day the CRA confirmed his tax liability, for filing a notice of appeal with the Tax Court of Canada regarding the reassessment for the 2005 and 2006 taxation years. The Federal Court of Canada overturned the CRA’s decision to reject the taxpayer’s request for a remission order and determined that the taxpayer’s application for a tax remission order should be sent back to the CRA for further review.

The central issue in Mokrycke is whether the CRA’s decision to deny the taxpayer’s remission request was unreasonable. In his request for remission, the taxpayer contended that the reassessments issued by the CRA were inaccurate due to circumstances beyond his control. Specifically, he argued that he was unable to effectively address the concerns raised by the CRA auditor or challenge the reassessed amounts. The taxpayer had relied on tax professionals to manage his tax matters because he was personally and professionally unable to respond to the audit. Unfortunately, his initial accountant couldn’t address the audit, and the second accountant failed to pursue the matter. As a result, the taxpayer sought relief on the grounds that he did not actually owe the taxes and penalties imposed by the CRA. In this instance, the Federal Court of Canada approved the taxpayer’s application and reasoned that it was unreasonable for the CRA to reject the remission request on the basis that the information reviewed during the remission process did not uncover any errors made by the CRA at the audit stage, especially when the audit process itself was the focal point of the dispute. Furthermore, the Federal Court of Canada emphasized that the CRA did not furnish explanations for its dismissal of the taxpayer’s assertion “that the failure of his professional representatives to discharge their responsibilities was an extenuating circumstance.” This case serves as a reminder to taxpayers that tax remission orders are granted at the discretion of authorities and are not readily obtained. Moreover, Mokrycke highlights some of the obstacles a taxpayer might encounter when seeking a tax remission order.

It’s important to emphasize that the extenuating factors mentioned above are not exhaustive. In cases where an extenuating factor beyond those mentioned is taken into account, it must be reasonable in the specific circumstances and directly relevant to the requested remission order.

The Legislation’s Unintended Consequences

If a taxpayer claims that the amount owed has arisen due to unintended consequences of the legislation, including but not limited to the Income Tax Act, it must be demonstrated that such a tax outcome is unfair and runs counter to the intended purpose of the specific provision within the relevant legislation.

Incorrect Actions or Advice Provided by CRA Officials

If the tax and penalties owed result from incorrect actions or advice given by CRA officials, the possibility of a tax remission order may arise. In such cases, a remission order might be suggested when a taxpayer faces additional tax and penalties (including interest) due to erroneous actions or advice from CRA officials. To evaluate whether a taxpayer has taken reasonable steps to address the alleged incorrect actions or advice from CRA officials, that taxpayer’s individual circumstances should be taken into account. Therefore, a tax remission order might be contemplated when:

• There is no indication of bad faith from the taxpayer seeking the remission order;
• The taxpayer could not reasonably have been expected to take timely actions to prevent or reduce the tax liability, to collect and remit the tax, or to claim a GST/HST rebate;
• The taxpayer has submitted the remission request within a reasonable timeframe, allowing CRA officials to conduct a thorough investigation; and,
• There exists written evidence that supports the claim that CRA officials have made errors in their actions or provided incorrect advice to the taxpayer. If written evidence is unavailable, alternative credible means of verifying the facts may be used.

According to the Federal Court of Canada in Mokrycke, for an error made by CRA officials in assessing tax to be considered, it must have been identifiable at the time of assessment, not based on later developments (such as a court overturning a previous decision that formed the basis of the assessment). To validate such an error, it must also be demonstrated that the taxpayer could not reasonably have been anticipated to:

• Submit a waiver;
• Lodge a Notice of Objection to the assessment;
• Present new information within the stipulated timeframes; or,
• Address the issue through alternative means.

Moreover, the consideration of a tax remission order recommendation should also account for any actions or advice from CRA officials that might have misled or deterred the taxpayer from pursuing timely and appropriate actions.

Tax Pro Tips – Seek for Tax Guidance and Application of Tax Remission Orders

A tax remission order is an extraordinary measure and providing specific tax guidance on whether it will be recommended is challenging. While the aforementioned guidelines offer a framework to potentially support an application for a tax remission order, they are not exhaustive. Factors such as a taxpayer’s history of compliance with the Income Tax Act and health issues may be considered when assessing whether the collection of a tax debt or enforcement of penalties is unreasonable, unjust, or contrary to the public interest. Nonetheless, it is highly advisable to include at least one of the guidelines mentioned above when preparing an application for a tax remission order.

As per subsection 165(1) of the Income Tax Act and subsection 301(1.1) of the Excise Tax Act, the timeframe for submitting a notice of objection to a notice of assessment or reassessment is “on or before the day that is 90 days after the day of sending the notice assessment.” Taxpayers have the option to directly appeal to the Tax Court of Canada to challenge the assessment, as outlined in subsection 169(1) of the Income Tax Act. This can be done either (a) after the CRA has confirmed the assessment or reassessment, or (b) after the expiration of the 90-day period following the objection filing, without having to await the CRA’s consideration of the objection.

Mokrycke highlights some of the difficulties taxpayers may encounter when they fail to meet the deadline for submitting a notice of objection to the CRA or a notice of appeal to the Tax Court of Canada. Failure to adhere to the objection deadline can result in subsequent filings being deemed invalid, thereby precluding the possibility of initiating a Tax Court of Canada appeal. Nevertheless, in specific situations, the failure to meet the time limit for filing a notice of objection in response to an assessment (or reassessment) issued by the CRA against a taxpayer may serve as a basis for a successful tax remission order application, as established in this federal court decision.

Insufficient relief from tax obligations, encompassing both the tax debt and imposed penalties, along with accrued interest, can lead to significant financial repercussions for individuals. If you find yourself in a situation where you owe taxes to the CRA, and your specific circumstances align with the notion that settling this debt would be inequitable, unreasonable, or against the public interest, or if you have missed the deadline to file a notice of objection in response to an assessment (or reassessment) issued by the CRA, we encourage you to reach out to our tax law firm with experienced Canadian tax lawyers who can provide you with expert tax guidance and support.

Disclaimer:

“This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the articles. If you have specific legal questions, you should seek the advice of a top Canadian tax lawyer.”