yes it can pay to challenge the CRA

If you filed your 2012 tax return late and you owed money, you’re probably in no hurry to receive your Notice of Assessment from the Canada Revenue Agency, showing the amount of your late-filing penalty and arrears interest owing.

But if you feel you’ve been unjustly charged a penalty or interest due to circumstances beyond your control, you should consider applying to the CRA under the “fairness provisions” for some relief.

The fairness legislation, introduced in 1991, gives the CRA the discretion to cancel or waive either all or a portion of any interest or penalties (but not the actual tax) payable.

But trying to argue the “dog ate my tax return” may not be enough. For the fairness provisions to apply, the penalties and interest must have generally resulted from circumstances beyond your control. Examples of “extraordinary circumstances” may include: natural disasters such as a flood or fire, a serious illness or accident or serious emotional or mental distress such as a death in the family.

If your request for interest or penalty relief is initially turned down by the CRA, you can request your case be reviewed a second time by the director of your tax centre or district office.

If it’s again denied, you can apply to the Federal Court for a judicial review.

Take, for example, the recent case involving NRT Technology Corp. which was assessed a late-filing penalty of just over $150,000 for the late remittance of its payroll withholdings on a management bonus of $7.1-million paid to its president on February 28, 2006.

The payroll remittance was made to CRA on March 14, 2006 but was actually due March 3, 2006, three days after month-end — since NRT was considered an “accelerated remitter” because its average monthly payroll withholdings was $50,000 or more.

The judge concluded since NRT did indeed remit the required amount eleven days after the error was made, the CRA’s decision to refuse relief was “unreasonable as it fails the requirements of being justified, transparent and intelligible.” He referred the matter back to the CRA for reconsideration.

David W. Chodikoff, a tax partner with Miller Thomson LLP who represented NRT, was pleased with the decision. “Common sense should have prevailed as [NRT] quickly discovered and remedied its filing error,” says Mr. Chodikoff, adding that “the CRA is not always right and sometimes it pays to challenge the CRA’s decision making.”