How to Reduce Interest and Penalties at CRA

An Excerpt from the 2023 CE Certificate Audit Defence Course

It goes without saying the filing tax returns and elections on time will help taxpayers prevent the punitive late filing penalties.  But, if the filing deadline has passed, look to the Voluntary Disclosure Program to see if you qualify to reduce penalties when late filing.  And then, if a return has been filed late, look to the Taxpayer Relief program to see if you qualify for tax forgiveness. The following are a summary of the programs.

Taxpayer Relief Program (form RC4288): The Minister may at any time waive or cancel all or any portion of any penalty or interest otherwise payable under the Income Tax Act. According to CRA IC 07-1 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 containing errors that led to the incorrect filing of a tax return,
• incorrect advice that was received by the taxpayer from a CRA employee, including that instalment payments were not required when in fact they were,
• errors in 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.

Unfortunately, CRA is behind in their processing.  On August 25, 2023 this was posted on their website:

“Under normal circumstances, the Canada Revenue Agency (CRA) aims to issue a taxpayer relief decision within 180 calendar days of receiving the request. However, we are receiving a higher-than-normal number of requests. We are processing requests within eight months for most cases, but it could take longer for more complex cases. When events beyond your control prevent you from meeting your tax obligations, the CRA may grant relief of penalties and interest.”

The Voluntary Disclosures Program (form RC199): This is described in CRA IC 00-1R 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."

Taxpayers who make a valid voluntary disclosure will have to pay the taxes and duties owing, plus interest. The voluntary disclosure will provide relief from penalties that could otherwise apply and prosecution.

Four criteria must be met for a taxpayer to make a successful application, under the VDP:

1. The disclosure must be voluntary (before an audit is initiated) and the taxpayer must initiate the voluntary disclosure;
2. The disclosure must be complete and accurate otherwise penalties will be charged to the entire file if it is found to be incomplete;
3. The disclosure must be specific to penalty relief; and
4. The disclosure must include information that is at least one year past due, or if less than one year past due, not initiated simply to avoid late filing or instalment interest penalties.

Once your balance is sent to the collections department, you will be contacted by an agent. It is a good idea to keep your agent informed about any relief programs, appeals, or objections that have been filed to prevent further escalation of collection efforts. Once the final balance owing is determined, the agent can work with you to set up a payment plan.

Make a Difference:  Tax advisors and clients who have a deep and transparent relationship can work together to reduce CRA costs, and in severe cases, avoid bankruptcy in doing so.  It’s important work, so don’t delay in making the connections.