Reduction For Worker Remittance For Undue Hardship To Employer – Tax

Canada:

Relief For Employee Remittance For Undue Hardship To Employer

03 March 2021

Rotfleisch & Samulovitch P.C.

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Taxpayer relief provisions

When a taxpayer fails to comply with his obligations under the
Income Tax Act or other taxation statutes that the Canada
Revenue Agency administers, the CRA will often apply penalties such
as late-filing penalty, repeated failure to report income penalty
and false statement or omissions penalty. However, there are
taxpayer relief provisions (formerly called fairness applications)
in the Income Tax Act that give the CRA discretion to
waive or cancel part or all portions of interest and penalties,
accept late filed, amended or revoked income tax elections, and
provide income tax refunds beyond the 3-year normal period allowed
for individuals. The CRA has also developed administrative
guidelines, described in Information Circular 07-1R1 that
lists the situations where the CRA may grant taxpayer relief. It is
important to realize that there is a 10-year limitation period in
which to apply for taxpayer relief. For example, if a taxpayer
wants to apply for relief for the 2011 tax year, the application
must be submitted to the CRA by December 31, 2021.

The CRA will only grant a taxpayer relief under the following
situations:

Extraordinary circumstances
1. This includes situations of natural or human-made disasters as
  well as civil disturbances or disruption of services, serious
  illness or accident, or significant mental or emotional distress.
  The current COVID-19 pandemic should normally qualify as
  extraordinary circumstances.
Actions of the CRA
1. This includes process delays that result in taxpayer not being
  informed within a reasonable time that amount was owing, error in material available
  to the public which led taxpayers to file returns or make payments
  based on incorrect information.
Inability to pay or financial hardship
1. This includes situations when collection is suspended due to
  the loss of employment and subsequent financial hardship, when
  payment of the accumulated interest would cause a prolonged
  inability to provide basic necessities such as food, medical care,
  transportation or accommodation.

s.153(1.1) of the Income Tax Act permits the CRA to
the lower the employer’s amount of remittance if it causes
undue hardship

According to s.153(1.1), where the CRA is satisfied that the
deducting or withholding of the amount of salary, wages or other
remuneration paid by an employer to an employee otherwise required
to be deducted or withheld under subsection 153(1) would cause
undue hardship to the employer, the CRA may determine a lesser
amount and that amount shall be deemed to be the amount determined
under that subsection as the amount to be deducted or withheld from
that payment.

The Federal Court rejected a staffing agency’s s.153(1.1)
argument because there was no undue hardship

A recent Federal Court case Allstaff Inc. v AGC sheds
some light on this provision. In this case, Allstaff Inc., a
temporary employment agency was required to deduct and remit
employee deductions and pay its share of those deductions to the
CRA as an employer, and charge and remit GST/HST on the labour it supplied to its
clients. It had consistently submitted its payroll remittance
payments late which incurred interest and penalties because it
prioritized paying its GST/HST remittances. Allstaff Inc. also
cited s.153(1.1) of the Income Tax Act and argued that it
could not pay the employee remittances in a timely fashion because
it had to prioritize paying its outstanding GST/HST payments.
Therefore, the CRA’s collections would constitute undue
hardship and Allstaff Inc. should be allowed to lower the amount of
its employee remittances.

The Federal Court reviewed the facts and decided that no
financial hardship existed, therefore s.153(1.1) did not apply. The
CRA’s Winnipeg Team leader found Allstaff Inc. had net profits
for the tax years from 2013 to 2016, positive shareholder equity
after considering year-end liabilities for the 2016 year as well as
consistent revenues and a consistent number of employees from 2012
to 2016. Accordingly, the CRA’s Winnipeg team leader expected
the taxpayer to borrow against assets or sell non-essential assets
to pay its tax debts. The court confirmed the CRA’s findings
and found that Allstaff Inc. reported over $3 million in increased
sales between taxation years 2016 and 2017 which was reasonably
sufficient to restructure business operations to ensure compliance
with all tax remittances.

Pro tax tips – “undue hardship” is not defined
statutorily in the Income Tax Act.

According to the Federal Court, the term financial undue
hardship is not statutorily defined and has not been judicially
considered. Following the decision in Canada (Minister of
Citizenship and Immigration) v Vavilov, 2019 SCC 65, the
Federal Court mentioned this kind of ambiguity would suggest the
court should give deference to the CRA which is statutorily
empowered to make such a decision. However, this in turn gives the
CRA an unfair advantage over a taxpayer. If you or your business is
struggling to pay off your tax interest and penalties due to
financial hardship, contact our tax law firm to speak with an
experienced Canadian tax lawyer to determine whether you
meet the undue hardship condition of the taxpayer relief provisions
and advise as to what other tax saving measures you might be
eligible.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.