For years, the CRA has consistently assessed taxpayers for GST/HST and interest in circumstances where although there was technical non-compliance with the rules, there was no true financial impact to the government. Examples of such situations (e.g. so called “wash transactions”) would include the wrong person collecting and remitting the GST/HST in a closely related group, or GST/HST not being collected in circumstances where the recipient would have been entitled to a full Input Tax Credit (“ITC”) in any event.
The practice of demanding interest for monies that the CRA already had in its possession, albeit received from another person, is viewed as patently unfair by many of the taxpayers so assessed. In the recent GST/HST case Gordon v AGC (2016 FC 643), the Federal Court put into issue the fairness of the CRA’s approach, and found that the CRA must consider waiving interest in these circumstances on a case by case basis.
The taxpayer Mr. Gordon purchased and imported a number of vehicles for resale. After Mr. Gordon refurbished the vehicles, they would be resold at Coastal Collision’s dealership. Both Mr. Gordon and Coastal Collision sought the advice of their accountants to determine their GST/HST responsibilities of this unusual business arrangement, and their accountants’ advice led the parties to the mistaken belief that Coastal Collision was responsible for remitting the tax, which Coastal Collision did in a timely manner.
Subsequently, Mr. Gordon was reassessed and charged interest on the GST/HST remittances submitted by Coastal Collision, with CRA taking the position that Mr. Gordon ought to have collected and remitted the GST/HST on the vehicle sales. At the time of his reassessment Mr. Gordon had a history of compliance with the ETA.
Mr. Gordon applied to the Minister to have the interest portion of his GST/HST Assessment cancelled. His position was that it was unfair to charge him interest on GST/HST payments that were already in the CRA’s possession – having been previously remitted by Coastal Collision – and which had been made in full and on time, albeit by the wrong registrant.
While the Minister agreed that the transaction qualified as a “wash transaction”, the Minister’s Delegate took the position that Guideline 16.3.1 only allowed cancellation of the interest above the standard 4% applied in wash transactions, and that the Delegate could not therefore cancel any of the 4% “standard” interest.
Mr. Gordon then applied for judicial review to the Federal Court.
The Federal Court noted the fundamental principle that discretion is “fettered” when a decision-maker treats a guideline as binding, when in fact it is not binding. In doing so, the Court emphasized that “Administrative guidelines do not have the force of law” (at para 29).
In viewing the facts of the case as a whole, the Federal Court concluded that the Minister’s delegate had in fact fettered her discretion, by simply following Guideline 16.3.1 without applying any independent analysis to the matter at hand. In doing so, the Federal Court noted that the Minister’s delegate failed to give any consideration to Mr. Gordon’s individual circumstances, including his history of compliance with the ETA.
In ruling for Mr. Gordon and in agreeing that the Minister’s delegate had fettered her discretion, the Court reminds us of the limits of administrative guidelines, and that discretionary decision-makers must not shirk their statutorily granted powers. Specifically, when making use of administrative guidelines, even discretionary decision-makers must also exercise the full breadth of their discretionary power to determine a fair response to the particular facts at hand.
From a GST/HST perspective, it remains to be seen what practical effect this decision will have on the CRA’s assessment practices in the future. On the one hand, the unfairness of demanding interest from one person where the CRA already had the money in its possession, albeit from another person, seems manifest. On the other, when dealing with a multi-stage transactional tax one needs to have a system of penalties (through interest or otherwise) to ensure that tax is collected, reported, and remitted on every transaction by the correct parties – making it difficult to wholeheartedly criticize the CRA’s approach.
Kathryn Walker & Rob Kreklewetz