It’s important to file your tax return on time, whether you’re an individual taxpayer or filing on behalf of your corporation. Failure to file your return on time can lead to late-filing penalties and arrears interest, charged at the prescribed rate for underpaid taxes, which is currently at nine per cent per annum, compounded-daily — and is not tax deductible.
Should you be hit with penalties and interest, you can always ask the Canada Revenue Agency to waive or cancel them under the taxpayer relief provisions. Should the CRA refuse your request for relief, you can have the CRA’s decision reviewed by a Federal Court judge to determine whether it was “reasonable.” That’s ultimately what happened in a recent case that was heard in court last month, involving a late-filed corporate tax return.
The corporate taxpayer was assessed $8,783.14 in penalties and interest due to the late-filing of its 2018 corporate tax return. The corporation was represented in court by its president and owner, who, while not a lawyer, was granted permission by the judge, in her discretion, to represent his corporation at the hearing.
The business owner argued that the late filing of his corporation’s taxes was not the corporation’s fault, but rather the fault of the corporation’s accountant. The owner argued that he had provided the income tax information to the accountant well before the filing deadline, but the accountant had relocated, and failed to file the return on time.
The corporation filed its tax return for the year ending Dec. 31, 2018 over six months late, on Jan. 17, 2020. The normal corporate tax filing deadline for corporations is six months from its year-end, which in this case would have been June 30, 2019.
After getting hit with the late-filing penalty and interest, the corporation submitted an initial request for relief to the CRA to cancel or waive these penalties and interest. In that request, the corporation stated that its tax return was late because its president, the owner, had been occupied with his ailing parents and that his accountant had moved offices. It seems that corporation had provided its paperwork to the accountant on April 12, 2019, but the accountant did not file the corporation’s return by the June 30 deadline. The owner also cited “financial hardship” and the corporation’s positive compliance history.
The CRA officer, performing a first-level review, denied the taxpayer’s request for relief, saying that the owner’s personal financial situation was not relevant to the corporation’s financial situation “as they are separate entities.” In terms of the owner’s parents’ medical situation, the CRA officer was unable to conclude that there were circumstances that prevented the corporation from filing its return on time. Finally, the officer held that, despite the accountant’s move, the corporation is ultimately responsible for ensuring its tax returns are filed on time.
The corporation then requested a second-level review of its application for taxpayer relief on the sole basis that the first-level CRA officer didn’t properly consider the failure of its accountant to file the tax return on time due to the relocation of the accountant’s practice.
This second-level review also denied the corporation’s request for relief, stating that “under Canada’s self-assessment tax system, corporations are responsible for ensuring their tax returns are … filed on time.… Although you may use the services of a professional, the relationship between a taxpayer and a tax preparer is one of choice, and any negative consequences of that choice remains between those parties. Relying on a professional, does not absolve you from your responsibility.”
The corporation then took the matter to Federal Court, where the judge was tasked with determining whether the CRA’s second-level decision to deny relief was reasonable. A reasonable decision is “one that is based on an internally coherent and rational chain of analysis and that is justified in relation to the facts and law that constrain the decision-maker.”
The judge, in reviewing the evidence, turned to the CRA’s published administrative guidelines for cancelling or waiving penalties and interest. Specifically, in situations involving third-party delays, the CRA will assess whether the circumstances were beyond the taxpayer’s control, pursuant to certain factors which include: natural or human-made disasters, such as flood or fire, civil disturbances or disruption in services, such as a postal strike, serious illness or accident, and serious emotional or mental distress, such as a death in the immediate family. Ultimately, however, taxpayers are generally responsible for delays caused by a third party acting for the taxpayer other than in “exceptional situations.”
The corporation argued that the CRA failed to properly consider its reason for the late-filing of its tax return, namely that its accountant had moved offices. In court, the owner argued that this was a matter out of the corporation’s control and that the corporation should not be penalized as a result.
Unfortunately for the taxpayer, the judge concluded that the accountant’s move “does not constitute either an extraordinary circumstance or an exceptional situation … that prevented the timely filing of the (corporation’s) tax return.” Furthermore, the judge noted that although the corporation provided its income tax information to the accountant on April 19, 2019, which was well before the June 30 filing deadline, the corporation failed to follow-up to ensure the return was being filed on time and only followed-up three months later, on July 20, 2019, after the filing deadline had expired. Ultimately, the tax return was not filed until Jan. 17, 2020, which was over six months after the filing deadline.
As a result, the judge determined that the CRA’s decision not to cancel the penalties and interest was reasonable. The judge was also sympathetic towards the business owner, refusing to grant the CRA its requested “costs” of $2,040 against the taxpayer, “having regard to all the circumstances of (the) case.”
Whether the taxpayer would be successful in making a claim against the accountant (or, ultimately, the accountant’s insurer) will depend on all the facts and circumstances surrounding their interaction, and whether the taxpayer can demonstrate that the accountant was negligent in not filing the corporation’s return on time.