Understanding Due Diligence Defence for GST/HST Penalties in Canada

If the CRA has assessed a GST/HST penalty against your organization, you may have grounds to challenge it. The due diligence defence is a recognized legal principle under the Excise Tax Act that allows registrants — including charities and nonprofits — to contest penalties by demonstrating they took reasonable care to meet their obligations.

This guide explains exactly what the CRA requires, what qualifies and what does not, and the practical steps to build a credible defence in 2026.

‍What is Due Diligence?

Due diligence, in the context of Canadian tax law, means taking all reasonable steps that a prudent person would take to understand and meet their legal obligations — even if the outcome was still incorrect. It is not about perfection. It is about demonstrable, genuine effort.

Under the Excise Tax Act (ETA), the CRA can impose penalties when a GST/HST registrant fails to remit or file on time. Canadian courts have recognized that strict liability penalties — like those under Subsections 280(1) and 280.1 — can be challenged on due diligence grounds. The Supreme Court of Canada has confirmed that where a penalty does not require proof of intent, a due diligence defence is available if the registrant can show they exercised reasonable care.

For charities and nonprofits, this is especially relevant because GST/HST obligations are often complex — involving partial exemptions, public service body rebates, and a mix of taxable and exempt supplies. Honest errors made while genuinely navigating these rules are precisely the type of situation this defence was designed to address.

‍Key Sections of the Excise Tax Act

1. 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.
• This is the most common penalty charities and nonprofits encounter. The 6% annual rate compounds, meaning even a short delay can result in a meaningful penalty — particularly for organizations with significant GST/HST remittances.

2. 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.
• The filing failure penalty escalates quickly. An outstanding balance of $10,000 unfiled for three months could generate a penalty of $1,000 plus an additional $750 (25% of $1,000 × 3 months). Organizations should prioritize filing even when they cannot pay in full, as the penalty for not filing is often larger than the interest on a late payment.

‍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.

In practice, the CRA reviews due diligence claims on a case-by-case basis. The stronger the evidence of proactive, documented compliance efforts, the more likely the CRA is to accept the defence. Organizations that can point to professional consultations, written records of their decision-making process, and a history of generally compliant behaviour are in a significantly better position than those who simply assert they did not mean to make an error.

How to Build a Due Diligence Defence: Step-by-Step

Building a successful due diligence defence requires more than saying you tried. The CRA expects documented, verifiable evidence of the steps you took. Here is how to structure your position.

Step 1 — Document Every Effort to Comply

Keep records of every action taken to understand your GST/HST obligations. This includes emails with your accountant, notes from calls with the CRA, and any written guidance you received. If you consulted CRA publications, note which ones and when. The more contemporaneous your documentation — meaning records made at the time, not reconstructed after the fact — the stronger your position.

Step 2 — Show You Sought Professional Advice

The CRA gives significant weight to cases where the registrant consulted a qualified professional — an accountant, tax advisor, or bookkeeper — before or during the period in question. Document the advice received and show you acted on it. Consulting a professional and then ignoring their guidance will not support a defence.

Step 3 — Demonstrate the Error Was Not Careless

There is a legal difference between a careless mistake and an honest error made despite genuine effort. Be prepared to explain why the error occurred, why a reasonable person could have made the same mistake given the complexity of the rules, and what steps have since been taken to prevent recurrence.

Step 4 — File a Request Under the Taxpayer Relief Provisions if Applicable

If your situation involves extraordinary circumstances — serious illness, a natural disaster, a banking error, or the death of a key officer — you can formally request penalty and interest relief using CRA Form RC4288 (Request for Taxpayer Relief). This is a separate process from a due diligence defence but can be filed alongside it where both grounds exist.

Step 5 — Respond to the Penalty Notice in Writing

When the CRA issues a notice of assessment that includes a penalty, respond in writing within the deadline. Lay out your due diligence defence clearly, reference the relevant subsection of the Excise Tax Act, and attach supporting documentation. If the amount is significant, engage a tax professional to draft the submission. A well-organized written response is more effective than a phone call.

‍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.

For charities specifically, the CRA has acknowledged that the complexity of GST/HST rules for public service bodies — including the charity rebate, the calculation of eligible input tax credits, and the distinction between taxable and exempt supplies — creates legitimate room for honest error. Courts have ruled in favour of registrants who made reasonable interpretations of complex provisions, provided they demonstrated a genuine attempt to understand and apply the rules correctly.

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.

It is also worth noting that the due diligence defence is stronger when applied to isolated, explainable errors — not patterns of repeated non-compliance. If the CRA finds that an organization has failed to remit or file correctly across multiple reporting periods without any corrective action, the defence becomes much harder to sustain regardless of the explanation offered.

Examples of Due Diligence Outcomes

1. 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.

2. 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.

3. 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.
4. Technical Errors:

• If a bank error delays payment, the CRA may accept the due diligence defence and cancel the penalty for late filing.

The table below summarizes common scenarios and whether a due diligence defence is likely to succeed:

Should You Use the Voluntary Disclosures Program Instead?

If your organization has unreported GST/HST, unfiled returns, or errors you have not yet corrected, the CRA's Voluntary Disclosures Program (VDP) may offer a better path than waiting for an audit and then raising a due diligence defence after the fact.

Under the VDP, an eligible applicant can come forward proactively, correct past errors, and potentially receive relief from penalties and some interest — without facing prosecution. To qualify, the disclosure must be voluntary (meaning the CRA has not yet contacted you about the issue), complete, and involve information that is at least one year overdue.

For charities and nonprofits, the VDP is particularly valuable because it allows organizations to correct years of filing errors related to partial exemptions, rebate miscalculations, or unreported taxable supplies — before those errors surface through a CRA audit.

The due diligence defence and the VDP serve different purposes. The VDP is proactive: you identify and correct an error before the CRA finds it. The due diligence defence is reactive: you contest a penalty the CRA has already imposed. If your organization is not yet under audit and you are aware of past filing errors, the VDP should be the first option you explore.

Conclusion

For charities and nonprofits in Canada, understanding the due diligence defence is not just about contesting a CRA penalty — it is about building the kind of documentation practices and professional relationships that prevent penalties in the first place. The organizations that successfully defend against GST/HST penalties are the ones that kept records, sought advice, and acted on it.

If you have received a penalty notice and believe you exercised reasonable care, document your position thoroughly before responding to the CRA. If you discover past errors before the CRA does, consider whether the Voluntary Disclosures Program is the right first step. Always keep detailed records and seek professional advice to bolster your position in disputes.

B.I.G. Charity Accounting Firm works exclusively with registered charities and nonprofits across Canada. If your organization is navigating a CRA GST/HST penalty or wants to strengthen its compliance processes, contact our team for guidance tailored to the charitable sector.

‍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.

Can a charity use a due diligence defence against a CRA GST/HST penalty?

Yes. Charities and nonprofits that are registered for GST/HST can raise a due diligence defence against penalties under Subsections 280(1) and 280.1 of the Excise Tax Act. The defence is more likely to succeed where the charity sought professional advice, documented its compliance efforts, and the error arose from the genuine complexity of GST/HST rules for public service bodies — not from carelessness or inaction.

What is the difference between a due diligence defence and taxpayer relief?

A due diligence defence argues that no penalty should have been imposed in the first place, because the registrant took all reasonable steps to comply. Taxpayer relief under CRA Form RC4288 is a separate process that asks the CRA to cancel or waive a penalty that was correctly imposed, due to extraordinary circumstances such as serious illness, a natural disaster, or a banking error. Both can be pursued simultaneously, but they address different legal situations.

How do I file a due diligence defence with the CRA?

There is no single CRA form specifically for a due diligence defence. You raise it by responding in writing to the notice of assessment that includes the penalty, or by filing a formal Notice of Objection (GST/HST Form GST159) within 90 days of the assessment date. Your written response should clearly document the steps you took to comply, reference the relevant provisions of the Excise Tax Act, and attach supporting evidence. For any significant penalty amount, engaging a tax professional to prepare the submission is strongly recommended.

Does the due diligence defence apply to interest charges as well as penalties?

No. The due diligence defence applies to penalties only, not to interest. Interest charged under the Excise Tax Act on late remittances runs from the date the amount was due and is not cancelled by a successful due diligence defence. However, in some circumstances, interest relief can be requested separately under the CRA's Taxpayer Relief Provisions.

What happens if the CRA rejects my due diligence defence?

If the CRA denies your defence at the first review, you can file a formal Notice of Objection within 90 days of the reassessment. If the objection is also denied, you may appeal to the Tax Court of Canada. The Tax Court has accepted due diligence arguments in multiple GST/HST cases where registrants demonstrated thorough, documented efforts to comply — so a rejection at the CRA level is not necessarily the end of the road.