This week is the Canadian Mental Health Association’s (CMHA) 70th annual Mental Health Week. New data released from the CMHA’s national monitoring survey found that the pandemic is taking an emotional toll on people in Canada, as 77 per cent of adults report feeling negative emotions as a result of the COVID pandemic. The five most common responses across Canada were “worried or anxious,” “bored,” “stressed,’ “lonely or isolated” and “sad.”
Mental illness, depending on its severity, can also hamper some individuals’ ability to stay on top of their finances, including the requirement to file tax returns in a timely manner. In severe cases, where tax returns remain unfiled year after year, this can lead to substantial interest and penalties, as it did in a federal court case decided last week. But before outlining the details of this case, let’s review the consequences of filing late.
Penalties for late-filing
The general deadline to file a personal tax return is April 30, but self-employed Canadians (and their spouse or partner) have until June 15 to file. Statistics released by the Canada Revenue Agency this week show that most Canadians do, indeed, file on time. As of May 3, the CRA had received 25.5 million 2020 personal tax returns, which is about 88 per cent of the total number of returns it expects to receive this tax season (based on the total number of returns filed for 2019).
If you’re late filing your return, you could be hit with a late-filing penalty of five per cent of your balance owing, plus one per cent of the balance owing for each full month your return is late, to a maximum of 12 months. And, if it’s not the first time you have filed late and you’ve been assessed a late-filing penalty in any of the prior three years, the penalties can double to 10 per cent of the unpaid amount, plus a two per cent penalty for each late month, to a maximum of 20 months. Repeated failure to file subsequent years’ tax returns on time, therefore, can add up to huge penalties (and arrears interest), as an Ontario taxpayer recently found out.
The case
The taxpayer was diagnosed with mental illness in the late 1990s. Since 2000, he filed most of his tax returns late, filing them in “bulk” in 2004 and 2008, with the remainder filed in 2017 and 2018. The taxpayer’s failure to file both income tax and Goods and Sales Tax/Harmonized Sales Tax returns (for his construction business) on time resulted in an assessment of late filing penalties, failure to file penalties and arrears interest for his 2009 through 2016 personal income tax returns and GST/HST returns. At the time, the assessed interest and penalties totaled just under $40,000.
The taxpayer wrote to the CRA requesting relief from the assessed penalties and interest for those tax years on the grounds of “serious illness and emotional or mental distress,” claiming he was unable to file on time due to “debilitating mental illness.” In support of his relief request, the taxpayer filed letters from his family physician, psychiatrist and social worker, indicating that the taxpayer experienced significant issues in addressing his tax returns due to the increasingly debilitating nature of his mental health conditions.
While acknowledging the challenges of his condition, the first-level decision maker at the CRA found that after over 10 years since the beginning his treatment in 2007, “it was reasonable to expect that (the taxpayer) would have mechanisms in place to meet his tax filing obligations.” The first-level decision maker concluded that relief was not warranted, so the taxpayer requested reconsideration by a second officer.
In the taxpayer’s second-level review request, which was carried out by a different CRA officer, the taxpayer submitted that his condition worsened after his initial diagnosis, and became “increasingly debilitating” such that putting mechanisms in place to ensure tax compliance was “not even fathomable.”
He explained to the CRA that he had to give up on the career that he went to college to pursue, as well as a second career, after being on short-term disability and then dismissed from the position, only surviving “through the generosity of family and friends” who provided him with some home construction work. By his late forties, the taxpayer was finally able to function at a “reasonable level,” but he was diagnosed with coronary artery disease, and was forced to hire an employee to continue operating his construction business.
During this time, he had paid all principal tax amounts owing, with the only amounts outstanding being penalties and arrears interest stemming from the period of time when he was plagued with debilitating mental illness. In the end, the taxpayer had to resort to using his business line of credit to make monthly payments toward the outstanding tax penalties and interest.
The second-level CRA reviewer reasoned that “as someone who (had) been dealing with these issues for many years … (he) could have put a mechanism in place to ensure compliance with his tax obligations.” The CRA official felt that the taxpayer had simply not exercised reasonable care or acted quickly enough to remedy the situation and thus refused to cancel the penalties and interest.
The taxpayer therefore sought a judicial review of the CRA’s second-level decision, asking the federal court to find it “unreasonable.” He felt that the CRA made a mistake in failing to exercise its discretion to waive interest and penalties by “misapprehending the medical evidence.”
Under the Income Tax Act, the CRA has broad discretion to waive or cancel all or any portion of any penalty or interest. The federal court’s role is to determine whether the CRA’s refusal to waive or cancel all or part of the penalty and interest assessed was reasonable. The federal court must determine whether the CRA’s decision “bears the hallmarks of reasonableness — justification, transparency and intelligibility.”
The judge was sympathetic towards the taxpayer and felt that the CRA’s reason for denying relief was unreasonable, calling it “not sufficiently transparent, intelligible or justified in light of the record.” Specifically, the judge failed to understand how, if mental illness rendered the taxpayer unable to comply with his tax obligations during the period in question, the CRA official could have nonetheless expected him to “implement a compliance mechanism.”
The judge set aside the CRA official’s decision and ordered the mattered returned to the CRA for redetermination by a different officer.