The Federal Court of Appeal has rendered its decision in theVilla Ste-Rose case.
Self-assessment of late-production real estate: no penalty and interest when the person is in a repayment situation.
Setting the scene
operates a residential facility for semi-autonomous or frail seniors in Quebec. Most of its revenues are GST/QST exempt, and Villa Ste-Rose was not registered for tax purposes. Following a fire that destroyed the shelter, Villa Ste-Rose decided to have the building rebuilt by a contractor. Throughout construction, Villa Ste-Rose paid taxes on its construction costs and did not claim any input tax credits (ITCs) or input tax refunds (ITRs).
When the tenants moved back into the building, Villa Ste-Rose should have self-assessed as if it had built a new building under the rules of the Excise Tax Act (hereinafter “ETA”) and the Act respecting the Québec sales tax. Villa Ste-Rose was therefore required to remit self-assessment taxes on the fair market value of the building. It was also eligible for the tax rebate on its construction costs, as well as the new rental property rebate.
Imposition of penalties and interest on late real estate self-assessment
The company learned of its tax obligations several months later after consulting a GST/QST expert. The company wanted to regularize its tax file. As a result, it self-certified and submitted claims for reimbursement. Eligible refunds exceeded the tax to be remitted on self-assessment. Revenu Québec calculated interest and penalties from the date the taxes were due, and granted refunds from the date the applications for refunds were filed. As a result, the company was charged penalties and interest even though it was in a repayment situation. Many others have unfortunately learned this the hard way in recent years.
Excise Tax Act
The company appealed to the Tax Court of Canada. In her decision, Justice D’Auray held that subsection 228(6) of the Excise Tax Act applied and that there should be a set-off between the GST to be remitted and the eligible refunds. Similar measures apply to QST.
A similar judgment was handed down in 2013 in Humber College Institute of Technology & Advanced Learning. This judgment was heard in informal proceedings and had no precedential value. The two Tax Court of Canada judges came to the same conclusion: a taxpayer who files a late self-assessment is at a disadvantage compared to a taxpayer who does nothing and waits for the tax authorities to assess him.
As part of an audit, the tax authorities are obliged to grant all unclaimed tax credits and refunds against the assessment. This means that interest and penalties are calculated on the amount of tax assessed, which is advantageous to a taxpayer at fault.
The judgment
The Federal Court of Appeal upholds the Tax Court of Canada’s ruling on the calculation of interest and penalties for late self-assessment. Interest and penalties must be calculated after eligible repayments. In the end, common sense prevailed!
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