Even when agency is wrong on tax law, those asking for relief may not receive a favourable judgment
Given Canada’s notoriously complicated tax system, it’s probably no surprise that even the Canada Revenue Agency occasionally makes mistakes in determining how much someone has to pay. When that happens, the taxpayer may choose to appeal their case in tax court.
But as a new note from Canadian tax lawyer David Rotfleisch points out, sometimes the CRA gets it wrong — but the tax court still can’t rule in the taxpayer’s favour. As an example, the founding lawyer of Rotfleisch & Samulovitch P.C. cited the recent case of 2237065 Ontario Inc. v. The Queen.
“For the tax years of 2011 and 2012, the taxpayer was a truck driver incorporated as an Ontario numbered corporation per his employer requirements,” Rotfleisch said. “He was advised by his employer that his services were zero-rated and thus he would be exempt from having to collect GST/HST taxes.”
To verify whether the information was correct, the taxpayer called the CRA to ask whether he had to collect HST as his employer was not collecting HST from him. The CRA said he did not, and the taxpayer followed that advice. But in 2016, the taxpayer found himself being reassessed by the CRA for his 2011 to 2014 tax years, particularly with respect to HST obligations under Part IV of the Excise Tax Act.
He took his case to the Tax Court of Canada, hoping to get relief for the years of 2011 and 2012. For those years, he was found to have been providing “driving services” rather than “freight transportation services” as defined in subsection 1(1) of Part VII, Schedule VI of the Excise Tax Act. Because of that, he was deemed not a carrier as defined in 123(1), meaning his services were not zero-rated.
“The taxpayer argued that he relied on incorrect advice given to him by CRA officers and was therefore entitled to some relief,” Rotfleisch said. “In this case, however, the court rejected this argument on the basis that it could not allow itself to be bound by the CRA's interpretation or representation of the law.”
Rotfleisch cited two other cases — Grondin v. The Queen in 2015 and Moulton v. The Queen in 2002 — wherein a taxpayer followed detrimental advice from the CRA only to be reassessed years later with no relief granted. In both cases, the tax court said it could not be bound by erroneous departmental interpretations of the CRA.
“The CRA gets tax law wrong all too often,” he said. “If the court allowed itself to be bound by the CRA's personal interpretation of the law or by all the representations it makes to taxpayers on a daily basis, there would not be much consistency in this field of law.”
While taxpayers cannot use incorrect interpretations of the law as a basis to seek relief from reassessments, the Tax Court can do so when it comes to penalties and interest. Specifically, Rotfleisch explained, subsection 220(3.1) of the Income Tax Act allows taxpayers to apply for relief from such penalties and interest.
“Per CRA policy, Information Circular IC 07-1, ‘Taxpayer Relief Provisions’ specifically states that interest and penalties may be waived where there are errors in CRA materials that are available to the public and information provided to the taxpayer,” he said.