CRA denied the taxpayer’s application for GST/HST rebate due to late filing—an $84,000 mistake
The taxpayer operated a personal care home in Newfoundland and Labrador and leased the building from an affiliated company. Beginning in March 2019, it paid rent to the affiliate, and the rent included GST/HST. In February 2020, the CRA notified the taxpayer that it was conducting a GST/HST audit to determine whether the building qualified as residential property. Due in part to delays caused by the COVID-19 pandemic, the audit took more than two years to complete.
On May 5, 2022, the CRA concluded that the building was residential rather than commercial. As a result, the taxpayer had paid GST/HST of $323,850 in error on rent beginning in March 2019 because the supply of residential units is an exempt supply. The CRA advised the taxpayer to file a rebate application under s. 261(1) of the Excise Tax Act (ETA). On July 27, 2022, the taxpayer applied for a rebate of $323,850 for the GST/HST paid in error under the lease.
The Minister allowed a rebate of $240,000 but denied $83,850 because the application was filed more than two years after that portion of the tax—paid between March 2019 and June 2020—had been remitted, contrary to s. 261(3) of the ETA. In addition, the taxpayer had no net tax or other amount owing that could be set off under s. 296(2.1). The taxpayer appealed to the Tax Court of Canada, which upheld the CRA’s decision.
The Court found that the taxpayer failed to apply for the rebate within the two-year limitation period and had no amounts payable that could be offset. Accordingly, the denial of the $83,850 rebate was confirmed.
Tax Court found that the deadline for the GST/HST rebate application imposes a strict limitation period
At issue was whether the minister correctly denied the taxpayer’s rebate claim for GST/HST paid in error in the amount of $83,850. The Tax Court first examined the relevant provisions under the Excise Tax Act and found that the ETA allows a person who has paid GST/HST in error to apply for a rebate from the Minister of National Revenue.
Under subsection 261(1), the CRA must refund amounts paid as tax, net tax, penalties, or interest that were not actually payable. However, subsection 261(3) imposes a strict limitation period: a rebate application must be filed within two years of the date the amount was paid. If the application is filed after this period, the rebate cannot be granted.
The Tax Court also confirmed that subsection 296(2.1) of the ETA allows the Minister, when assessing a taxpayer’s net tax or another overdue amount, to apply an “allowable rebate” as a set-off against amounts the taxpayer owes, even if the rebate was not formally claimed in time. However, this mechanism only applies where the taxpayer actually has net tax or an overdue amount payable against which the rebate can be applied.
At the hearing, the Counsel from the Department of Justice representing the CRA initially suggested that subsection 296(2.1) might allow the Minister to apply the $83,850 rebate as a set-off against any net tax or overdue amounts owed by the appellant. However, it was later confirmed that the appellant had no net tax or other amounts payable, meaning the relieving provision could not apply.
The Tax Court of Canada concluded that the appeal had to be dismissed. The taxpayer failed to file the rebate application within the two-year limitation period, and there was no available set-off under subsection 296(2.1).
Although the Tax Court acknowledged that the outcome could be viewed as unreasonable or unjust, the statutory requirements were clear and left no discretion. Consequently, the Minister’s assessment denying the $83,850 rebate was upheld.
The Taxpayer may still apply for a remission order regarding the rebate
The Tax Court also noted that CRA could have informed the appellant, within a reasonable time after beginning its tax audit in February 2020, that it had been paying GST/HST in error on rent since March 2019. However, due to pandemic-related delays and the involvement of three different auditors, the CRA did not communicate this until more than two years later. As a result, the appellant filed its rebate application too late to recover $71,850 of GST/HST paid in error. While the Court cannot order relief, it noted that the appellant may consider applying for remission of the unrecovered amount.
Pro tax tips – the remission order is a taxpayer’s last resort
A tax remission order is generally considered a taxpayer’s last resort for relief from tax debt and related penalties (including interest) after all other avenues of taxpayer relief have been exhausted. Under subsection 23(2) of the Financial Administration Act, the Governor in Council may remit any tax or penalty, including any associated interest, if it determines that collecting the tax or enforcing the penalty would be unreasonable, unjust, or otherwise not in the public interest.
Because tax remission orders are discretionary, they are granted only in exceptional circumstances. If you have already pursued all available taxpayer relief options, it is strongly recommended that you consult an experienced Canadian tax lawyer for guidance on whether a tax remission order application may be appropriate.
FAQ:
What is the deadline for taxpayers to file an application for a GST/HST rebate?
Most GST/HST rebate applications in Canada must be filed within two years of the date the tax was paid or became payable. This strict deadline applies to general rebates (errors), new housing rebates (owner-built or builder-built), and new residential rental property rebates. However, certain Public Service Bodies’ (PSB) rebates may allow up to four years.
What is a remission order?
A remission order is a rare, discretionary, and last-resort measure in Canada that cancels or refunds tax, interest, or penalties deemed unfair, unjust, or in the public interest. Granted under the Financial Administration Act by the Governor in Council, this “extraordinary measure” is only considered when all other legal avenues, such as objections or appeals, have been exhausted.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.