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MISSED A GST/HST REBATE DEADLINE?

TCC SAYS SUBSECTION 296(2.1) MAY NOT SAVE LATE GST/HST REBATE CLAIMS

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Taxpayers who fail to file a GST/HST rebate application within the applicable two-year limitation period may, in some circumstances, look to the relieving provisions in subsection 296(2.1) of the Excise Tax Act (“ETA”) for assistance. That provision seemed to require an otherwise unclaimed (or statute-barred) GST/HST rebate to be applied against a taxpayer’s net tax if the period was later audited.

In this Indirect Tax Report we review the recent Tax Court of Canada decision, Heritage Square Retirement (2026 TCC 39, "Heritage Square"), which has ruled out s. 296(2.1) in this particular situation – seeming leading – in our view – to an "unjust enrichment" of CRA.

Heritage Square

In Heritage Square, the taxpayer operated a personal care home and leased the premises from an affiliated company. It paid GST/HST on the rent under the mistaken belief that the tax was payable. CRA later determined, on audit, that the rental supply was exempt and that the GST/HST had therefore been paid in error. The taxpayer applied for a rebate under subsection 261(1) of the ETA. CRA rightly denied the rebate on the basis that the application was filed outside the 2-year limitation period in subsection 261(3).

On appeal to the Tax Court, the taxpayer sought to rely on s. 296(2.1), a relieving provision that can permit an otherwise unclaimed or late-filed rebate to be applied against a taxpayer’s net tax.

The Tax Court ruled to dismiss the appeal, finding in its view that ETA 296(2.1) could NOT provide relief because the taxpayer had no "net tax" or overdue amount against which the rebate could be set off. To the TCC's mind, ETA 296(2.1) could allow an otherwise unclaimed rebate to reduce an amount owing by the taxpayer but did not create a refund where there is no amount owing.

Commentary

Heritage Square now squarely (!) stands for the proposition that ETA 296(2.1) can ONLY operate as an offset mechanism and CANNOT operate as a standalone "net tax" refund provision.

Whether the TCC's decision will pass the test of time is debateable.

Both ETA 296(2.1) and its "ITC counterpart" in ETA 296(2) clearly allow for "auditing to net tax" (see Welch, 2010 TCC 449), and getting to the correct "net tax" amount is a fundamental policy objective of the ETA. Most problematically for this particular decision, "net tax" is not a "positive-only" concept: ETA 225 defines "net tax" as a "positive or negative amount determined by" specific formula – making this concept fundamentally different from, say, "income tax". Indeed, many GST registrants (e.g., exporters) will ALWAYS be in a "net tax" refund position.

Regrettably, it seem possible that this important definition of "net tax" was not actually put before the TCC in this case, perhaps depriving the Court the opportunity of properly considering it.

Either way, we view BOTH ETA 296(2.1) and 296(2) as requiring a proper auditing "to net tax", whether leading to decreases in "net tax" owing or increases in "net tax" refundable. ETA 296(2.1) is not just an "off set" provision: it can be a refund provision.

While the TCC itself acknowledged the result was “unreasonable and unjust", the law for now will be that ETA 296(2.1) will only be a an "off set" provision.

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