7 April 2008 Internal T.I. 2008-0273391I7 - Taxpayer Relief Provisions

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether penalties and interest relating to the 1993 and 1994 taxation years may be waived under subsection 220(3.1) when the request for relief was not made until 2005

Position: No

Reasons: Minister has no authority to waive interest and penalties relating to taxation years that fall outside the 10-year time limit

 									April 7, 2008

Ms Patricia Spice 						Headquarters
Director, Competent Authority Services Division		Income Tax Rulings
Compliance Programs Branch	  				Directorate
344 Slater Street, 5th Floor					Ted Harris
Ottawa ON  K1A 0L5						(613) 957-2114

Attention:  Amy Wang						2008-027339 

Re: Taxpayer Relief Provisions - Subsection 220(3.1)

We are writing in response to your email request of April 3, 2008 wherein you requested our interpretation of whether subsection 220(3.1) of the Income Tax Act (the "Act") may be applicable to the situation described below.

XXXXXXXXXX . (the "Company") has been the subject of ongoing competent authority proceedings between the Canada Revenue Agency and the U.S. Internal Revenue Services relating to its 1993 to 2006 taxation years. An agreement has now been reached and reassessments will be made to increase the taxes payable by the Company for each of its 1993 to 2006 taxation years.

In anticipation of possible additional Canadian taxes payable as a result of these proceedings, the Company's legal advisors, in its letter dated December 28, 2005, made a protective request that the Minister waive all penalties and interest otherwise payable by the Company for any relevant year pursuant to subsection 220(3.1) of the Act. Similar requests were made in subsequent letters of December 14, 2006 and December 27, 2007 from the Company's legal advisors.

Your question is whether the Minister has the legislative authority to waive any penalties and interest relating to the proposed reassessments of the Company's 1993 and 1994 taxation years in view of the 10-year limitation in subsection 220(3.1) of the Act and the fact that the first request was made on December 28, 2005.

Our Comments

Subsection 220(3.1) provides as follows:

The Minister may, on or before the day that is ten calendar years after the end of a taxation year of a taxpayer (or in the case of a partnership, a fiscal period of the partnership) or on application by the taxpayer or partnership on or before that day, waive or cancel all or any portion of any penalty or interest otherwise payable under this Act by the taxpayer or partnership in respect of that taxation year or fiscal period, and notwithstanding subsections 152(4) to (5), any assessment of the interest and penalties payable by the taxpayer or partnership shall be made that is necessary to take into account the cancellation of the penalty or interest.

Furthermore, as indicated in paragraph 20 of Information Circular IC07-01 Taxpayer Relief Provisions:

¶ 20. Subsection 220(3.1) gives the Minister the discretionary authority to waive or cancel all or part of any penalty and interest otherwise payable by a taxpayer under the Act. The request must be made within the 10-year time limit described in ¶ 13.

Paragraph 13 describes this limit as follows:

¶ 13. Due to this limitation, a taxpayer has 10 years from the end of the calendar year in which the tax year or fiscal period at issue ended to make a request to the CRA for relief. This limitation applies to each of the legislative provisions described in ¶ 9.

In our opinion, the CRA would not have the legislative authority under subsection 220(3.1) of the Act to waive any interest or penalties relating to the Company's 1993 or 1994 taxation years as the first request was made in 2005, which is outside the 10 year limitation period provided. Furthermore, as the request was not made before 2005, the transitional relief provided in subsection 48(1) of S.C. 2005, c.19 would not be applicable.

Although it has been suggested that the words "in respect of that taxation year or fiscal period" should be interpreted to refer to the year in which the interest accrued 1 , we do not agree with this view. In the case of Montgomery v. M.N.R. [1995] 1 C.T.C. 196, 95 D.T.C. 5032, a similar argument was considered with respect to coming-into-force provisions for the 1993 amendment to subsection 220(3.1), which provided that the amended version was applicable "to the 1985 and subsequent taxation years." In that case, the taxpayers argued that the coming-into-force provisions in subsection 127(5) of S.C. 1993, c. 24 did not restrict the Minister from exercising the discretionary relief provided under subsection 220(3.1) in respect of interest payable for their 1984 taxation year "because the interest in question was indeed "payable under this Act" in the 1985 and subsequent calendar years even though the tax liability in respect of which it was imposed arose in the 1984 taxation year." In rejecting the taxpayer's arguments, Stone J.A. cited with favour the following comments of Pinard J., who ruled on the taxpayers' motion at trial:

I believe Parliament's intent, in subsection 127(5)...was to limit the Minister's discretion to waive interest payable on those returns filed for the 1985 taxation year, and for subsequent taxation years.

Whereas tax returns are filed once a year, every year, interest, on the other hand, is compounded daily. There would have been no need to include "taxation year" or "subsequent taxation year", if the cut off point were to be determined by reference to the accruing of interest and not the year for which a return was filed.

In our opinion, this conclusion would be just as applicable to the 10-year time limit subsequently added by subsection 48(1) of S.C. 2005, c.19.

We trust that these comments will be of assistance.

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES

1 See Notes to subsection 220(3.1) in The Practitioner's Income Tax Act, 2007, 32nd Edition, David Sherman, Editor Thomson Carswell