Principal Issues: Where multiple assessments are issued involving a series of transactions, is there any relief to taxpayers with respect to interest expense where one or more of the reassessments are determined to be incorrect?
Position: Response provided by CPB - General comments provided.
Reasons: See below.
STEP CRA Roundtable - June 2014
Question 19 Multiple Assessments
Suppose that a taxpayer carried out a series of transactions, where the tax consequences of each transaction are relevant to the next transaction. CRA believes that the transactions are inappropriate, and constitute tax avoidance, and accordingly reassesses the transactions, either under specific principles or the general anti-avoidance rule. However, because the transactions depend on one another in a sequence, and there may be some uncertainty as to which transaction should be reassessed in the sequence, CRA reassesses each transaction independent of the other. The result is a series of tax reassessments which cannot all be correct. In addition, the tax involved may be greater than the value of the transaction in all, when viewed from beginning to end, so that it would be impossible for the taxpayer to pay the tax. In addition, of the various reassessments, it is arguable that only one of them, at most, could be correct.
It is noted that CRA may issue reassessments even though they may not be correct, and that these reassessments are not invalidated as a result. However, at the same time, the taxpayer cannot be expected to pay all of the assessments, because that may be impossible.
In these circumstances, what would CRA recommend in order to minimize interest expense? Would the impossibility of paying the full amount of the tax, combined with the fact that only one of the reassessments, at most, can be correct, give rise to a circumstance where a waiver of interest should be considered under the fairness provisions?
CRA Response
In situations where the Agency believes a transaction or a series of transactions is designed to avoid, defer or reduce taxes and where the result of these strategies would provide a taxpayer with a tax benefit that is contrary to the object and spirit of the tax provisions, the Agency would challenge the result by issuing a reassessment for each relevant tax year. Such a reassessment would first be proposed to a taxpayer in a letter setting out the Agency's understanding of the facts and its views on the application of the Income Tax Act to those facts and allow time for the taxpayer to provide representations in response.
A proposal may rely on a number of legal and tax provisions as secondary or alternative positions, including specific anti-avoidance provision or the general anti-avoidance rule (GAAR) as provision of last resort, however only one reassessment for a tax year would be issued.
Subsection 152(4) of the Income Tax Act provides the time limits within which reassessments may be made. A reassessment of a tax year replaces any previous assessments or reassessment for that year and would not result in double or cumulative tax owing. In cases where a taxpayer is subsequently reassessed as a result of an objection or appeal to court, the amount of interest would accordingly be changed.
Subsection 220(3.1) of the Income Tax Act gives the Minister the discretion to waive or cancel arrears interest, in whole or in part, that accrued within the last 10 calendar years before the year in which the request was made for any tax year debt. This provision also gives the Minister the discretion to waive or cancel any penalty for a tax year that ended within the last 10 calendar years before the year the request was made.
As discussed in Information Circular IC07-1, Taxpayer Relief Provisions (at paragraphs 27 and 28), the CRA may provide interest and penalty relief in situations where a taxpayer has a confirmed inability to pay or is experiencing financial hardship related to the balance owed to the CRA.
For an individual taxpayer, financial hardship refers to the financial difficulty that the payment of arrears would cause a taxpayer in being able to provide for reasonable basic living requirements, such as food, medical, shelter or transportation. For a corporate taxpayer, financial hardship refers to situations where the continuity of business operations, the continued employment of the employees, and welfare of the community as a whole would be in jeopardy.
Interest relief may also be provided in circumstances where a taxpayer has made bona fide efforts to pay the balance owed; however, substantial additional interest charges would absorb a significant portion of their payments making it extremely difficult, if not impossible, for a taxpayer to resolve their account within a reasonable amount of time.
A taxpayer is required to make full financial disclosure (with supporting documentation) when requesting interest and penalty relief, so that the CRA can determine a taxpayer's ability to pay the balance owing.
For more information on the Taxpayer Relief Provisions, including details on how to make a request and the types of supporting documentation required, go to www.cra.gc.ca/taxpayerrelief.
Vyjayanthi Srikanth (for CPB)
2014-052302