2023-0974091I7 Interaction between s. 220(3.1) and 227.1(1)

Principal Issues: Does subsection 220(3.1) allow the Minister to cancel penalties and interest assessed by virtue of subsections 227(10) and 227.1(1), if they attach to a corporation’s liability that dates more than 10 calendar years back?

Position: The Minister’s discretion is limited to the interest that accrued during the 10 calendar years preceding the application under 220(3.1).

Reasons: The combined effect of subsections 227(10) and 227.1(1) is not to create a new tax debt. Under 220(3.1), the Minister has the discretion to cancel the interest and penalties payable in respect of a taxation year, provided the taxpayer makes an application within the following 10 calendar years. When analyzing the merits of the application made under 220(3.1), the Minister has to give consideration only to that portion of the director’s assessment that pertains to a penalty levied against the corporation in any of the 10 preceding calendar years as well as the interest that accrued during that period.

Author: Girard, Pierre
Section: 152(8), 153(1), 160(2), 222, 227(10), 227.1(1), 227.1(2), 227.1(7), 220(3.1)

                                                                               March 26, 2024
Collections and Verification Branch                       HEADQUARTERS
Business Compliance Directorate                         Income Tax Rulings Directorate
Employer Compliance Division                              Specialty Tax Division
                                                                                P. Girard

Attention:   Judith Mahoney                                    2023-097409

Director’s liability and subsection 220(3.1)

Unless stated otherwise, all statutory references in this document are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.) (the “Act”), as amended to the date hereof.

We are writing in reply to your inquiry of April 18, 2023 in which you requested our views on a situation that touches on the interaction between subsections 227.1(1) and 220(3.1). We apologize for the delay in our reply.

Your request involves a corporation that was assessed in 2007, 2008 and 2010 with respect to the 2006 to 2009 taxation years. The amounts assessed to the corporation are all in respect of unremitted source deductions and the penalty as well as the interest thereof for the failure to remit or the late-remittance of source deductions.

In January 2014, on the basis that the corporation had ceased its operations in 2008 due to the lack of business and financial hardship, the corporation applied for penalty and interest relief under subsection 220(3.1) for its 2006 to 2009 taxation years. The application was denied for the penalties but partially granted for the interest that accrued between June 18, 2008 and April 3, 2009.

Following the registration of a certificate in the Federal Court for the unpaid amounts of the corporation, the Canada Revenue Agency (“CRA”) assessed the director of the corporation pursuant to paragraph 227(10)(a) in September 2018.

In light of these facts, you asked for our views as to whether the Minister has the discretion under subsection 220(3.1) to waive or cancel the penalties and interest assessed to a director under paragraph 227(10)(a) with respect to the liability of the corporation, where the request for relief was made more than 10 calendar years from the end of the taxation year to which the penalties and interest relate. You also asked if the fact that the director informed the CRA in 2014 that the corporation ceased its operations at the end of the 2018 taxation year has any impact on the application of subsection 220(3.1).

Our comments

Every person paying an amount referred to in paragraphs 153(1)(a) to (v) has to deduct or withhold from the payment, the amount determined by the applicable provisions of the Income Tax Regulations.

Where a corporation has failed to deduct or withhold an amount as required by section 153, subsection 227.1(1) provides that the directors of the corporation, at the time of the failure, are jointly and severally liable to pay, together with the corporation, that amount and any interest or penalties relating to it.

Pursuant to paragraph 227(10)(a), the Minister may, at any time, assess the director for any amount payable under section 227.1. A director can object to such an assessment on several basis, including the situations covered by subsections 227.1(2) to (4). According to the facts of your request, nothing indicates that the corporation or its director ever undertook the required steps to object to any of the assessments that were issued to them. As a result, the assessments are deemed valid and binding pursuant to subsection 152(8).

It is worth mentioning that caselaw is settled on the fact that an assessment raised as a result of paragraph 227(10)(a) and subsection 227.1(1) does not create a new debt. More precisely, the only debt is that of the corporation and the effect of subsection 227.1(1) is to add a second debtor to assist in the collection of the tax debt owed by the corporation. Said otherwise, the director’s liability under subsection 227.1(1) arises from his joint and several liability with the corporation and does not create a second tax debt. As will be explained hereafter, this is relevant for the purposes of subsection 220(3.1).

Subsection 220(3.1) provides the Minister with the discretion to waive or cancel penalties and interest. This discretion can be exercised by the Minister on or before the day that is 10 calendar years after the end of a taxation year of a taxpayer. As appears from the wording of subsection 220(3.1), the Minister’s discretion is limited to the penalty and interest payable by the taxpayer “in respect of that taxation year”.

In the context of a director’s liability under subsection 227.1(1), we are of the view that the phrase “in respect of that taxation year”, as used in subsection 220(3.1), should not be viewed as a reference to the taxation year in which the director was assessed. Instead, the director’s joint and several liability, together with the fact that this liability arises from the Act rather than the assessment, support the conclusion that the phrase “in respect of that taxation year” should be read as a reference to the underlying liability (i.e. that of the corporation).

According to the facts of your request, the application under subsection 220(3.1) was made by the director in 2019 as a result of an assessment issued to him in 2018 by virtue of paragraph 227(10)(a) and subsection 227.1(1). As previously mentioned, the amount assessed to the director represents the corporation’s liability that arose from various assessments previously issued to the corporation in 2007, 2008 and 2010 for its 2006 to 2009 taxation years. In our view, it would be incorrect to argue that the director was allowed, in 2019, to request a full cancellation of the amounts assessed to him in 2018 as these amounts are not penalty or interest payable “in respect of the 2018 taxation year”. They are rather penalties or interest payable in respect of previous taxation years (i.e. 2006 to 2009).

In the situation you presented, subsection 220(3.1) would limit the Minister’s discretion to the penalties assessed in respect of any of the 10 calendar years preceding the year in which the application was made by the director. As for the interest, the Minister’s discretion is limited to the interest that accrued during the same period. The fact that the director advised the CRA within the 10-year limitation period that the corporation ceased its operations in 2008 does not impact this conclusion.

Where subsection 220(3.1) does not apply, such as the situation outlined in your inquiry, a taxpayer can request a remission review. Remission is discretionary and provides full or partial relief from federal tax, interest, penalty, or other debt paid or payable under legislation administered by the CRA. However, it should be noted a remission order is a rare and extraordinary measure.

We trust these comments will be of assistance.

Yours truly,

Gillian Godson
Manager, Administrative Law Section I
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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