A New Playing Field for Waiver of Interest and Penalty

“The ten-year rule refers to the years during which the interest accrued..”

The Federal Court of Appeal issued a landmark decision on June 2, 2011, changing the landscape for applications for waiver of interest and penalty.

The Canada Revenue Agency (CRA) has a policy of “Taxpayer Relief” (formerly called “Fairness”), under which it may waive interest and penalty in extraordinary circumstances, such as where a taxpayer was affected by illness, where the CRA provided wrong information, where there have been unreasonable delays on the CRA’s part, and various other circumstances. This waiver is authorized under subsection 220(3.1) of the Income Tax Act.

In 2004, subsection 220(3.1) was changed to prohibit the CRA from providing such interest waiver unless application for relief was made to the CRA within ten years after the end of the taxation year.

The interpretation of this rule was uncertain.  The CRA and some early court decisions said that the “taxation year” was the original year in which the debt arose.  The contrary view, put forward for many years by the TSG’s David Sherman in his Practitioner’s Income Tax Act, was that it referred to the years during which the interest accrued.

To take a simple example:  suppose you invested in a tax shelter in 2000, and the CRA reassessed you in 2002 to deny the shelter benefits.  After many delays on the CRA’s part, you lose an appeal in the Courts in 2011.  Assume the delays were sufficient to qualify for Taxpayer Relief interest waiver.

The CRA would say that if you didn’t apply for interest waiver by the end of 2010, they had no legal authority to waive the interest that accrued on your 2000 taxation year from 2001 on, even though you would otherwise qualify for relief.

The Federal Court of Appeal has now ruled otherwise.  In Bozzer v. The Queen, 2011 FCA 186, the Court of Appeal ruled that the ten-year rule refers to the years during which the interest accrued.  Thus, in this example, if you apply for relief during 2011, the CRA would have authority to waive all of the interest that accrued from 2001 on.  (Of course, you still have to qualify under the CRA’s Taxpayer Relief guidelines.)

The CRA could still apply for leave to appeal the Bozzer  decision to the Supreme Court of Canada, but this is not expected to happen, as it is unlikely that the Supreme Court would be willing to hear the case.

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