Wildfires: Apply for Taxpayer Relief Provisions

Evelyn Jacks

It may not be the first concern, but Canadians affected by wildfires may worry at some point about the tax consequences of lost records or missed filing deadlines – the next one on June 16 for those filing T1 returns with proprietorship income. Fortunately, the CRA offers Taxpayer Relief Provisions when there are circumstances beyond a taxpayer’s control, including natural disasters, serious illness or death in the family, or errors made by the CRA, which may trigger penalties and interest due to late or incomplete tax filings. Here’s what you need to know.

It may not be the first concern, but Canadians affected by wildfires may worry at some point about the tax consequences of lost records or missed filing deadlines – the next one on June 16 for those filing T1 returns with proprietorship income. Fortunately, the CRA offers Taxpayer Relief Provisions when there are circumstances beyond a taxpayer’s control, including natural disasters, serious illness or death in the family, or errors made by the CRA, which may trigger penalties and interest due to late or incomplete tax filings. Here’s what you need to know.

The Backdrop.  The Canadian tax system is based on self-assessment. It encourages taxpayers to self-report income, deductions and credits and to file their tax returns on time. Canadians in fact are very compliant.  Of the over 31 Million tax returns filed fewer than 500,000 (less than 2%) file late with a penalty, and on average that penalty is only $320.

The success of our self-assessment tax system revolves around the themes of fairness and equity, which are promoted specifically through two initiatives at the federal level:

• Voluntary Compliance Program: which gives taxpayers the ability to comply voluntarily with the law.  In this case, you must let CRA know you erred before they tell you.  
• Taxpayer Relief Provisions (formerly known as the Fairness Package): permits CRA to show leniency in certain circumstances, as described above.

The Voluntary Compliance Program (VCP) is described in CRA publication IC 00-1 as "a fairness program that is aimed at providing clients with an opportunity to correct past omissions, thus rendering themselves compliant. By offering this opportunity for clients to self-correct, the program provides a greater level of fairness to all clients and stakeholders."

Three criteria have to be met for a taxpayer to file a delinquent return or make changes to prior filed returns, under the VCP:

• The disclosure must be voluntary (before an audit is initiated)
• The disclosure must be complete - otherwise penalties will be charged to the entire file if it is found to be incomplete.
• The disclosure must be specific to penalty relief.

Otherwise, adjustments to previously filed returns, or the filing of a delinquent return, are made under the Taxpayer Relief Provisions.

Taxpayer Relief Provisions.  CRA is bound by a three year statute of limitations when selecting tax returns for audit and reassessment, unless there is fraud.  However, the taxpayer has privileges to request tax refunds over a broader time frame. In 1991, a series of administrative measures, known as the "Taxpayer Relief Provisions" (formerly known as "The Fairness Package"), were introduced to allow taxpayers leniency in three areas:

• the cancellation and waiver of interest and penalties assessed to taxpayers (S. 220(3.1))
• the acceptance of late, amended or revoked elections (S. 220(3.2) to 220(3.7))
• the refund of overpaid taxes beyond the normal three-year period (S. 152(4.2) and 164(1.5).

Taxpayers and their advisors can also request leniency in circumstances specific to the taxpayer by contacting CRA, and completing form RC 4288, outlining the following:

• Name of Taxpayer
• Social Insurance Number
• Corporation or Business Numbers
• Partnership numbers
• Taxation year(s) in question
• Reason for delay in filing or inability to pay.
• Date and details of transactions that form the subject of the waiver.
• Proposal for cure/settlement

Model Taxpayer Factor.  The Fairness Committee will assess all requests for leniency based on the following criteria:

• Date and details of transactions that form the subject of the waiver.
• Did the taxpayer have a favourable history of compliance?
• Has the taxpayer conscientiously paid off balances due?
• Has the taxpayer exercised reasonable care in meeting obligations of self-assessment?
• Has the taxpayer acted quickly to cure any problems with CRA?

In addition, extraordinary events that may give rise to the cancellation of penalties and interest include:

• natural or human-made disasters,
• civil disturbances or interruptions in service, such as a postal strike,
• serious accident or illness,
• serious emotional or mental distress, such as a death in the family,
• processing delays at CRA which result in the taxpayer not being informed within a reasonable time frame that taxes were owing,
• published materials available to the public from CRA contained errors that lead to the incorrect filing of a tax return,
• incorrect advice was received by the taxpayer from a CRA employee including that instalment payments were not required when in fact they were,
• errors in the processing of the return,
• when CRA has suspended collection activities because of an inability on the taxpayer's part to pay,
• when the taxpayer cannot make a reasonable arrangement to repay because the interest charged absorb such a large part of the payment. In these cases, CRA has the authority to waive interest until taxes are caught up.

Bottom Line:  These requests will be assessed on an individual basis.  This can take 8 months or longer to complete however.  To apply online, and individual may sign in to My Account or Represent a Client and under “Accounts and payments” select “Request relief of penalties and interest”.  To apply online for a business, go to My Business Account or Represent and select the correct account (income tax, GST/HST, payroll, etc.) and then request relief.

Additional educational resources: The CE Summit Advisory Diploma Program which features a comprehensive online audit defence event on September 17.  Register for the full program online!