This article in the Financial Post illustrates how easy it is to get into serious financial issues with the CRA and how difficult it can be to get out. In this Federal Court case, the taxpayer relied on the CRA’s auto-fill feature to populate the income fields in their return, which in turn created a liability of more than $70,000 in arrears interest for not including investment income in his return. The situation was as follows:

“The CRA’s omission of the Spreadsheet compromised Mr. Brand’s ability to address the issue of arrears interest in December 2021.”

“The case involved a Quebec taxpayer who filed his 2019 tax return just before the June 1, 2020, deadline (the April 30 deadline was extended as part of the COVID-19 relief measures). Since the taxpayer and his wife were not living at home at the time due to the pandemic, he didn’t have access to the majority of the tax slips he would normally receive by mail.

Instead, he turned to the CRA’s Auto-fill feature to download all available tax slips from his CRA My Account using the TurboTax software. He then Netfiled his tax return from a remote location.

It seems that when the taxpayer prepared his 2019 tax return, certain T5 slips from Royal Bank of Canada did not appear in his CRA My Account, meaning the income reflected on those T5 slips was inadvertently omitted from his 2019 return. The income on the T5s, “which was substantial,” had accumulated over 10 years in an investment account, but only became taxable in the 2019 year “due to a legislative change.”

As soon as the taxpayer received the letter, he contacted the CRA and was advised to verify his return against the information showing in CRA My Account. He did so, and confirmed the T3 and T5 slips that he had used to prepare his 2019 tax return in May 2020 corresponded exactly with the data in CRA My Account in December 2021, so the taxpayer concluded everything must be in order.

But the CRA in June 2022 issued a Notice of Reassessment that included the omitted income from the RBC T5 slips. The agency also charged him more than $70,000 in arrears interest on the amount reassessed. (No penalty was imposed because it was the taxpayer’s first income omission in the prior four years.)

The taxpayer immediately requested relief from the arrears interest, but was rejected. He then submitted a second request for relief, explaining he had contacted RBC upon receiving the CRA reassessment and was told the unreported income had come from a long-term RBC mutual fund that had matured in 2019.

The taxpayer had opted not to receive annual statements from RBC, so he was unaware of this income. In addition, since the income was automatically reinvested by RBC, he had no knowledge of it.”

 

From the decision for the case:

The Minister’s delegate gives the following explanations for denying relief:

• Mr. Brand filed his 2019 tax return on May 25, 2020, while the RBC T5 Slips were processed in the system on February 24, 2020. Those Slips were available on time from the CRA with valid addresses displayed, “yet we have no record of a conversation between you and a CRA representative regarding the missing slip.

• The omitted income represented more than 75% of Mr. Brand’s total net income for the year.

• Mr. Brand was not prevented from reporting his income in full in 2019 and, therefore, relief for the arrears interest charged is not warranted.

 

The analysis by the judge was great:

“Canada’s income tax regime is built on the principle of self-assessment: each taxpayer is required to conduct their financial affairs in compliance with the ITA and all regulations administered by the CRA, including the requirement to file timely and accurate returns. I agree with the Respondent that this principle is the cornerstone of the Decision and of the individual conclusions drawn by the Minister’s delegate after review of Mr. Brand’s file.

Mr. Brand does not dispute his responsibility to file accurate tax returns but argues that, in the context of his request for relief and the principle of fairness, the Minister’s delegate failed to consider the exceptional circumstances engendered by the COVID-19 pandemic and the CRA’s own role in his omission of the income reflected on the RBC T5 Slips. Mr. Brand prepared and filed his 2019 tax return remotely in reliance on the information in his My Account, the use of which is encouraged by the CRA. Mr. Brand argues that his ability to file an accurate return was compromised by the CRA’s failures (1) to make available the RBC T5 Slips in My Account, and (2) subsequently, to include the Spreadsheet referenced in the Unreported Income Letter. These failures, coupled with the automatic reinvestment of the income by RBC, meant that he had no knowledge of the income and no way to mitigate the consequences of its inclusion in income between 2019 and 2022.

The Minister’s delegate made no error in focusing their consideration of the Second Request on the importance of Mr. Brand’s obligations to file complete and accurate tax returns but the principle of self-assessment is not in every case a complete response to a taxpayer request for relief. In the present case, there is no reference in the Fact Sheet or in the Decision to the guidelines that provide a framework of analysis for CRA agents and decision makers assigned to respond to taxpayer requests for relief. In fact, neither the Minister’s delegate nor the Agent tasked with review of the Second Request addressed either of Mr. Brand’s arguments regarding the CRA’s errors in managing his file or the hardship occasioned by the imposition of arrears interest on an omission from his 2019 tax return that the Respondent accepts was unintentional. These arguments raised two of the three factors identified as relevant in paragraph 23 of the Circular. I find that the Decision is not transparent or justified against the relevant facts and the principle of fairness that underlie subsection 220(3.1) of the ITA for the following reasons.

First, I find that the failure by the Minister’s delegate and the Agent to consider the impact of the CRA’s errors on Mr. Brand’s ability to mitigate the unanticipated inclusion in his 2019 income of a significant sum is a reviewable error that alone warrants the Court’s intervention.

The parties’ records establish two CRA errors that contributed to the arrears interest in question and to the period of time during which the interest accrued. First, the Respondent does not dispute Mr. Brand’s evidence that the RBC T5 Slips were not in his My Account both when he prepared and filed his 2019 return in May 2020 and when he re-checked My Account after receipt of the Unreported Income Letter in December 2021. The CRA gives no explanation for the omission of the RBC T5 Slips from My Account. The Agent and the Minister’s delegate are silent on this subject and on the effect of the omission on Mr. Brand. They state only that the RBC T5 Slips were available by February 24, 2020, well before the filing deadline. I agree with the Respondent that there is no evidence that the CRA guarantees that documents in My Account are accurate and complete. I also agree that Mr. Brand was responsible for verifying his tax information but, in my view, the Minister’s delegate was required to weigh Mr. Brand’s responsibility to confirm the accuracy of his reported income against the CRA’s error, taking into account the exceptional circumstances of the early months of the pandemic. The process of weighing the strict provisions of the ITA against the particular circumstances put forth by a taxpayer is central to the exercise of discretion contemplated by subsection 220(3.1).

Second, it is clear that the CRA failed to append the Spreadsheet of T3 and T5 slips to the Unreported Income Letter. Mr. Brand acted promptly after receipt of the Letter by calling the CRA. The CRA representative instructed him to check his 2019 tax return against the T3 and T5 slips in My Account. Mr. Brand did so. The information in My Account remained consistent with the information included in his 2019 return and he took no action.

The CRA’s omission of the Spreadsheet compromised Mr. Brand’s ability to address the issue of arrears interest in December 2021. In contrast, the Agent states in the Fact Sheet that Mr. Brand was only “somewhat” attentive to his own affairs because he received the Unreported Income Letter in December 2021 but did not clear the majority of the balance owing in his account until June 14, 2022. Effectively, the Agent’s conclusion was that Mr. Brand contributed to the accumulation of arrears interest during the intervening six month period. This conclusion ultimately factored into the Agent’s negative recommendation to the Minister’s delegate. Again, Mr. Brand had no knowledge of the unreported RBC income or of the arrears interest until after receipt of the Notice of Reassessment on June 23, 2022. The failure by the Agent and the Minister’s delegate to consider the CRA’s omission of the Spreadsheet therefore undermines the justification in the Decision for the denial of relief.

The Minister’s delegate faults Mr. Brand for failure to call the CRA regarding the missing RBC T5 Slips. However, this statement ignores the fact that Mr. Brand did not know of their existence. Further, the Agent and the Minister’s delegate rely on the fact that the missing income represented 75% of Mr. Brand’s total net income for 2019. In their view, the quantum of the RBC income should have led Mr. Brand to take immediate action. However, Mr. Brand states that the full amount of the RBC income was automatically reinvested by RBC. In other words, the reference in the Decision to the quantum of the omitted RBC income is a red herring because Mr. Brand did not receive payment of the income out of his investment account. He was not put on notice by a sudden increase in his bank account, for example. In fairness to the Minister’s delegate, the record before the Court is ambiguous as to whether the automatic reinvestment by RBC was made clear to the CRA. If that is the case, the Minister’s delegate cannot be faulted for their conclusion that the amount of the RBC income should have been noticeable to Mr. Brand as a windfall in his account.

Finally, the Minister’s delegate did not address Mr. Brand’s submissions in the Second Request regarding the hardship he and his wife suffered due to the addition of arrears interest to what was already a very large tax obligation in 2019. The Agent’s failure to take hardship into account is not itself a reviewable error in this case but the oversight contributes to the lack of justification for the Decision.”

The Final  Result

The judge sent the CRA’s decision back to the CRA for reconsideration by a new officer to consider the entirety of the context which led to the addition of significant interest for what amounts to an unintentional omission. As I stated at the beginning of this post, it is ever so easy to get caught up in the tax machine and ever so hard to extricate oneself. If you receive an assessment for tax owing and believe it may be a mistake, immediately speak with one or more ZheroTax professionals and get their opinion on how to proceed. Their years of experience dealing with the CRA may make the difference.

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