The Canada Revenue Agency’s (“CRA”) administrative position on computation of interest and penalty for late-filed GST/HST returns has been that it applies on “all amounts outstanding” (notwithstanding possible available refunds, rebates or input tax credits (“ITCs”) that could reduce the amounts outstanding, if properly claimed). This approach has recently been corrected by the Federal Court of Appeal (“FCA”) in Canada v Villa Ste-Rose Inc. 2021 FCA 35, which has confirmed that this interest and penalty only applies to the amount of “net tax” that remains after deducting (in this case) possible rebate claims.
Facts of the Case
Villa Ste-Rose Inc. was a non-profit corporation operating a senior’s residence and making exempt supplies. It re-built/substantially renovated a fire destroyed building, which required it to self-assess tax under subsection 191(3) of the Excise Tax Act (“ETA”), and submit a return with the Minister under subsection 228(4). As its supplies were exempt, it was not entitled to ITCs, but it was entitled to rebates under subsections 256.2(3) and 257(1) of the ETA (the “Rebates”). Had Villa Ste-Rose actually made a timely submission of the GST/HST return and a rebate application – it did not – it would have been entitled to a net refund. Instead, Villa Ste-Rose filed GST/HST returns late and included their rebate applications (filed within the timeframe under ETA) with those returns, causing CRA to assess and apply interest and late-filling penalty on the total amount of “GST/HST collectible” ($736,864.18), but without first reducing the amount on which interest and penalty would apply, by the Rebate credits due to the taxpayer. This resulted in a much higher amount of interest and penalty ($50,090.01) that might otherwise had not been the case.
The taxpayer appealed to the Tax Court of Canada (“TCC”) and took the position that the Minister was required to calculate interest and penalty based on the “net tax” owing, not the total amounts collectible.
The TCC Decision
Villa Ste-Rose was successful at the TCC, whose decision held that under the modern statutory interpretation of subsection 228(6), the Minister was required to apply any interest and penalty on “net tax after deducting the rebates”. The Court noted that under 296(2.1) of the ETA, the Minister is required to give credit to a taxpayer who fails to claim any eligible rebates or ITCs, before issuance of an assessment, thus concluding that if the same approach was not applied for “interest and penalty” purposed under sections 280 and 280.1, an absurdity would result (i.e., putting an inactive taxpayer in a better position than the taxpayer who took positive steps to file a return and claim a rebate).
The FCA’s decision affirmed TCC’s approach on the basis that the rebates provided for under sections 256.2(3) and 257(1) of the ETA were designed to prevent double taxation from non-registered taxpayers who could not otherwise claim ITCs on tax paid, thus putting them in the same footing as registered taxpayers. A non-registered taxpayer should not be at a fiscal disadvantage than a registered taxpayer who could claim ITCs. Therefore, the net tax calculation for the purpose of applying interest and penalty should remain same regardless of the deductions claimed (ITCs or Rebates).
Commentary
It is not uncommon for unregistered taxpayers to be in the dark regarding their GST/HST obligations and reporting requirements. This is especially so for exempt service providers such as public service bodies. The TCC and FCA’s approach here is welcomed and one really cannot understand CRA’s approach in attempting to collect interest and penalties on amounts that are not really due to the CRA.
Taxpayers finding themselves in similar situations ought to challenge their GST/HST assessments!