CRA denied late filing taxpayer relief on penalties and interest

If you filed your 2025 tax return late, or you have yet to file, you could face a late-filing penalty of five per cent of any balance owing, plus one per cent of the balance owing for each month your return is late, to a maximum of 12 months. (Self-employed taxpayers and their spouse or partner still have until June 15 to file on time for 2025.)

If it’s not the first time you’ve filed late, and you’ve been assessed a late-filing penalty in any of the prior three years, the penalties can double to 10 per cent of the unpaid amount, plus a two per cent penalty for each late month, to a maximum of 20 months.

When you add to this the non-deductible arrears interest, compounded daily, charged at the current prescribed interest rate of seven per cent, the penalties and interest charges can really add up.

Should you be hit with penalties and interest this tax season, you can ask the Canada Revenue Agency to waive or cancel them under the taxpayer relief provisions . Should the CRA refuse your request for relief, you can have the CRA’s decision reviewed by a Federal Court judge to determine whether the CRA officer’s decision was “reasonable.” That’s ultimately what happened in a recent case that was heard in court last month, involving two late-filed personal tax returns.

The taxpayer, who works in the Canadian film and television industry as a specialized technician, appeared in a Halifax courtroom last month seeking relief from late-filing penalties and arrears interest for his tax debt arising from the 2020 and 2021 taxation years.

In his request for relief, the taxpayer testified that he suffered “financial, familial and medical issues” during the COVID-19 pandemic that affected his ability to meet his tax filing and payment obligations. These issues included an inability to reach his long-time accountant, despite numerous calls that went unanswered, after the taxpayer and his spouse relocated from Western Canada with an infant and into a home that needed significant repairs. While the taxpayer eventually found a new accountant in Nova Scotia, it took that new accountant time to get up to speed on the taxpayer’s financial situation. In addition, the taxpayer’s health situation meant he suffered from periodic debilitating pain. To make matters worse, the film and television industry experienced significant declines in activity during the pandemic, and again in 2023.

The initial CRA officer who reviewed his submission expressed sympathy for his situation, but nonetheless denied his request for relief. The taxpayer then requested a second review by a different CRA officer, which also resulted in a denial of his request for relief. The second CRA review officer determined that the taxpayer’s household income and tax-free savings account (TFSA) were sufficient to pay his tax balance owing without a prolonged inability to afford basic necessities of life. The CRA officer noted that the taxpayer continued to make annual contributions to his TFSA while the interest on his tax debt was accruing. The officer was also unable to find a connection between the taxpayer’s non-compliance and the circumstances he presented in his relief request.

The taxpayer thus turned to federal court seeking a judicial review of the CRA’s second review decision. He challenged the reasonableness of the decision, arguing that the CRA failed to consider his evidence in its totality, relied on irrelevant considerations, and failed to apply its own policy .

At trial, the taxpayer submitted that the CRA officer “did not engage meaningfully with key facts he presented,” which included his medical documentation, the breakdown in his relationship with his accountant, his cross-country move in 2019, pandemic disruptions and the cumulative strain of these factors. He felt that, in his view, the CRA “assessed his circumstances too narrowly and individually rather than considering their cumulative and prolonged impact over time.” According to the taxpayer , this lack of engagement demonstrated “a failure in justification.”

The CRA countered that, under the Income Tax Act, the agency has broad discretion to accept or reject a taxpayer’s request for a waiver or cancellation of penalties and interest otherwise payable to the CRA.

The taxpayer essentially disagreed with the CRA officer’s decision, and was essentially asking the court to reweigh the evidence and come to a different conclusion. But this is not the court’s role on a judicial review. Rather, the federal court’s role is to consider whether, based on the arguments and evidence presented to the CRA officer, the reasons given and conclusion drawn were “intelligible, transparent and justified when read holistically.”

As the judge wrote, “The fact that a different decision-maker might have made different inferences or drawn different conclusions from the facts, in itself, does not make a decision unreasonable. The Court generally will intervene only where it is satisfied that the evidence overwhelmingly is against the decision-maker’s findings.”

The taxpayer then argued that the CRA’s decision was unfair because his company did not receive any grants from the government during the pandemic and that, because of this, he had to drain his company’s bank account to pay his taxes owed for the tax years 2020 and 2021. As he put it, “A fair approach would have prevented this endangerment of the survival of his company.” The judge dismissed this argument, finding it irrelevant.

The taxpayer also tried to argue that his income, TFSAs, and registered retirement savings plan (RRSP) were “irrelevant considerations.” The judge disagreed, referring to the CRA’s own Information Circular on the Taxpayer Relief Provisions , which explicitly mentions that the “CRA will review in detail a taxpayer’s financial situation to determine their ability to pay amounts owing and the interest charges that will continue to accrue. A financial review considers such things as: income and expenses; assets and liabilities; ability to borrow funds and sell assets; actions and efforts to pay amounts owing.”

In the end, the judge was simply not persuaded that the evidence the taxpayer submitted in support of his requests for relief were sufficient to call into question the reasonableness of the CRA’s decision, and thus the judge dismissed the taxpayer’s application for review.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. [email protected] .

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