Executive Summary: Key Legal and Evidentiary Issues

• Heritage Square Retirement Living Inc. paid GST/HST in error on exempt residential rental unit supplies from March 2019, totalling $323,850, under the mistaken belief it was required to do so.

• The Appellant's rebate application filed on July 27, 2022, was partially denied because $83,850 of the claimed amount fell outside the two-year limitation period under subsection 261(3) of the Excise Tax Act.

• A CRA audit that began in February 2020 took over two years to complete due to the COVID-19 pandemic and the assignment of three different auditors, delaying notification to the Appellant.

• Crown counsel conceded the Minister would have issued the $83,850 rebate had the application been filed within the statutory deadline.

• No net tax or overdue amounts existed against which the Appellant could set off the $83,850 rebate under the relieving provision in subsection 296(2.1) of the Act.

• Justice Spiro noted it "would not be wrong to conclude" an unreasonable and unjust result flows from the application of the law and raised the possibility of the Appellant applying for remission of $71,850 under subsection 23(2) of the Financial Administration Act.

Background and facts of the case

Heritage Square Retirement Living Inc. operates a personal care home in Conception Bay South, Newfoundland and Labrador. The company leases its building from an affiliated entity, 60697 Newfoundland and Labrador Ltd. Beginning in March 2019, Heritage Square paid rent to the affiliated company and paid GST/HST to the Canada Revenue Agency on those rental payments, doing so in good faith but under the mistaken belief that it was required to do so under the Excise Tax Act. This belief was mistaken: the supply of residential rental units is an exempt supply, and no GST/HST is payable on such transactions.

The CRA audit and its protracted timeline

In February 2020, Jacqui Morgan, the Appellant's chief executive officer, received a call from a CRA auditor, Mr. Mohammed, who told her that the CRA was undertaking a GST/HST audit to determine whether the building was a residential property. Starting in mid-April 2020, Canada was paralyzed by the COVID-19 pandemic. In January 2021, Mr. Hamm, the second auditor, was assigned to the file. By April 2022, the third and final auditor, Ms. Murphy, had been assigned to the file. Once assigned, Ms. Murphy acted quickly to conclude the audit. On May 5, 2022, she informed Ms. Morgan that the building was residential rather than commercial. On that basis, the CRA proposed to assess the numbered company $1,875,000 in GST/HST, though Ms. Murphy assured Ms. Morgan that no interest or penalties would be assessed against the numbered company from March 2020 to the date of the assessment, as the audit had taken over two years to complete.

Discovery of the erroneous payments and the rebate application

During the same May 5, 2022 conversation, Ms. Murphy mentioned that because the supply of residential rental units is an exempt supply, Heritage Square had been paying GST/HST of $323,850 in error on its rent payments to the numbered company starting in March 2019. She suggested that the Appellant file a rebate application under subsection 261(1) of the Excise Tax Act, but noted that some amounts had already exceeded the two-year limitation period. Ms. Morgan testified that she asked how she could have known there was a two-year limit or that they were paying HST in error until she received the call that day. Ms. Murphy responded that she would have had no way to know, and in her words said, "I know it's super frustrating but that's the way it is." She also told Ms. Morgan to file the form before July 31 or risk losing more. The Appellant filed its rebate application on July 27, 2022, requesting the full $323,850.

The statutory limitation period and the denied portion

Under subsection 261(3) of the Excise Tax Act, a rebate application must be filed within two years after the day the amount was paid or remitted. Because the Appellant did not file until July 27, 2022, GST/HST payments made between March 31, 2019, and June 30, 2020 — totalling $83,850 — fell outside that two-year window. On May 24, 2023, the Minister assessed the Appellant, allowing $240,000 as a GST/HST rebate under subsection 261(1) but denying the remaining $83,850 under subsection 261(3). The Appellant took no issue with any of the factual assumptions relied upon by the Minister, including that the payments related to exempt supplies and that the application was filed more than two years after the day the GST/HST at issue was paid.

The subsection 296(2.1) set-off issue

The Act also includes a relieving provision in subsection 296(2.1), which allows a person to set off an allowable GST/HST rebate against any net tax, or overdue amount, payable by that person, even where no rebate application has been made. At the conclusion of the hearing, Crown counsel expressed the hope that the parties would consent to a judgment under which the Minister would reassess to set off the allowable GST/HST rebate of $83,850 against any net tax or overdue amount payable by the Appellant. However, one week later, Crown counsel wrote to the Court saying that the Crown was unable to consent to such a judgment as the Appellant had no net tax, or overdue amount, payable against which the allowable GST/HST rebate of $83,850 could be set off under subsection 296(2.1). An exchange of written submissions ensued.

The ruling and outcome

Justice David E. Spiro of the Tax Court of Canada dismissed the appeal, without costs. He concluded that the Appellant failed to file a rebate application within two years of having paid GST/HST of $83,850 in error, and that it had no net tax, or overdue amount, payable against which the allowable GST/HST rebate of $83,850 could be set off. The Court stated it had "no choice but to conclude that the assessment denying the GST/HST rebate of $83,850 was correct." Justice Spiro further observed that it "would not be wrong to conclude that an unreasonable and unjust result flows from the application of the law to the facts." He noted that within a reasonable time after commencing its audit in February 2020, the CRA could have informed the Appellant that it had been making monthly payments of GST/HST in error, but due to the effect of the pandemic and the assignment of three different auditors, the CRA did not share that information until more than two years later. The Court also noted that had the Appellant filed its rebate application even one, two, or three weeks after the May 5, 2022 conversation, it would have recovered $12,000 of the $83,850, since the GST/HST of $6,000 paid on each of May 31, 2020, and June 30, 2020, would have been within the two-year window. While the appeal was dismissed and no amount was awarded in favour of the Appellant, Justice Spiro raised the possibility of the Appellant applying for remission of $71,850 of the GST/HST paid in error under subsection 23(2) of the Financial Administration Act, which allows Cabinet to remit tax where it considers collection to be "unreasonable or unjust." However, as cited in Almadhoun v Canada, 2018 FCA 112, it is not for the Court to order the Minister to make any such recommendation.