Understanding Due Diligence Defence for GST/HST Penalties in Canada
The Canada Revenue Agency (CRA) outlines its stance on accepting a due diligence defence against penalties for non-compliance with the Excise Tax Act (ETA).
Here's a simplified overview of the key points:
What is Due Diligence?
- Definition: Due diligence refers to the reasonable efforts made by a person to comply with tax obligations.
- Context: In the case of GST/HST, due diligence can be used to contest penalties for late payments or failure to file returns.
Key Sections of the Excise Tax Act
- Subsection 280(1):
- Imposes a 6% annual penalty for failure to remit or pay GST/HST amounts when required.
- Interest is also charged at a prescribed rate.
- Section 280.1:
- Imposes penalties for failing to file returns, calculated as:
- 1% of the outstanding amount, plus
- 25% of that amount for each month overdue, capped at 12 months.
CRA's Position on Due Diligence
- The CRA does not explicitly allow for a due diligence defence under subsections 280(1) and 280.1, but it can be accepted in certain circumstances.
- The CRA may cancel or waive the penalties if a person demonstrates due diligence.
Requirements for Establishing Due Diligence
- Evidence of Efforts: The burden is on the individual to prove they exercised due diligence.
- Sincere Attempts: Efforts must reflect what a reasonable person would do in similar situations.
- Specific Scenarios:
- Miscalculations based on reasonable but mistaken assumptions may be excused.
- Reliance on incorrect information may also be grounds for a defence, provided reasonable care was exercised.
Limitations to the Due Diligence Defence
- Mathematical Errors: Simple errors in calculations typically do not qualify for a due diligence defence.
- Inadequate Records: Failure to maintain proper records will weaken a defence.
- Third-Party Advice: Sole reliance on incorrect advice from a third party may not be sufficient unless the advisor's actions support the claim of due diligence.
- Late Payments: Generally, the due diligence defence will not apply if a correct amount is paid late.
Examples of Due Diligence Outcomes
- Example of Rejected Defence:
- A registrant made an error in their tax calculation, resulting in a penalty. The CRA denied the due diligence defence as unintentional mistakes do not qualify.
- Example of Accepted Defence:
- A business owner consulted various sources, including CRA officials and an accountant, about tax treatment for a product. Despite an audit finding that the product was taxable, the CRA accepted the due diligence defence due to the owner's thorough research.
- Extreme Circumstances: If unforeseen events, like a family death, impede timely filing, the individual may still seek relief from penalties under taxpayer relief guidelines, although due diligence might not apply. This provision offers a safety net in extreme situations, providing a sense of reassurance to the reader.
- Technical Errors:
- If a bank error delays payment, the CRA may accept the due diligence defence and cancel the penalty for late filing.
Conclusion
Understanding the CRA's stance on due diligence is crucial for charities and nonprofits aiming to avoid or contest penalties related to GST/HST compliance. This knowledge empowers you to navigate penalties under the Excise Tax Act with confidence, feeling well-informed and prepared. Always keep detailed records and seek professional advice to bolster your position in disputes.
Frequently Asked Questions
Here are answers to common questions about Canadian taxes, GST/HST, and tax compliance. These simple explanations will help you understand key tax concepts and requirements.
What is the defense of due diligence in Canada?
Due diligence is a legal defense that shows you took reasonable care to follow the law. If the Canada Revenue Agency charges you with a tax offense, you can use this defense to prove you tried your best to comply. You must show that you took all reasonable steps to avoid breaking tax rules, even if a mistake happened anyway.
What is a GST HST notice of compliance?
A GST/HST notice of compliance is a document from the Canada Revenue Agency that confirms your business meets all GST/HST requirements. You need this notice before you can get certain government contracts or licenses. It proves your GST/HST accounts are in good standing and you have filed all required returns.
What is the penalty for tax avoidance in Canada?
Tax avoidance penalties in Canada depend on how serious the case is. The penalty is usually 25% of the tax benefit you tried to avoid. In severe cases, you might face additional penalties up to 200% of the avoided tax. You could also face criminal charges with fines up to 200% of the evaded tax and possible jail time.
What is exempt from GST HST in Canada?
Many essential items are exempt from GST/HST including basic groceries, prescription drugs, medical devices, most health care services, educational services, childcare services, legal aid services, and most financial services. Residential rent and most insurance products are also exempt.
What is a GST HST in Canada?
GST/HST is a consumption tax on goods and services in Canada. GST (Goods and Services Tax) is 5% and applies across Canada. HST (Harmonized Sales Tax) combines GST with provincial tax in some provinces. The HST rate varies by province, ranging from 13% to 15% depending on where you live.
Who is exempted under GST?
Small suppliers with annual revenues under $30,000 are exempt from registering for GST/HST. Public service bodies like charities, non-profits, municipalities, hospitals, and schools may also be exempt from GST/HST on certain activities. Some specific businesses and activities have special exemptions based on what they do.
What is GST exempt in Canada?
GST-exempt items include basic food items like bread, milk, and vegetables, prescription medications, medical and dental services, educational courses and tutoring, childcare services, municipal transit, and most insurance policies. These items have no GST/HST charged at all, unlike zero-rated items where GST/HST is charged at 0%.
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