Ruling suggests taxpayer seek remission order under Financial Administration Act
While acknowledging that applying the law to the facts might lead to an unreasonable and unjust result, Canada’s Tax Court dismissed an appeal against the partial denial of a requested rebate of goods and services tax/harmonized sales tax (GST/HST).
In Heritage Square Retirement Living Inc. v. The King, 2026 TCC 39, the appellant leased a building from an affiliated numbered company to operate a personal care home in Conception Bay South, Newfoundland and Labrador.
Starting in March 2019, the appellant paid rent to the numbered company. In good faith, the appellant paid GST/HST to the Canada Revenue Agency (CRA) on its rent payments under the mistaken belief that it had to do so under the Excise Tax Act, 1985 (ETA).
In February 2020, a CRA auditor called Ms. Morgan, the appellant’s chief executive officer. The first auditor shared that the CRA was conducting a GST/HST audit to determine whether the building was a residential or commercial property.
In mid-April 2020, the COVID-19 pandemic paralyzed the country. In January 2021, a second CRA auditor took over the appellant’s file.
By April 2022, the CRA assigned the file to a third auditor, Ms. Murphy. In May 2022, Ms. Murphy informed Ms. Morgan that the building was residential, not commercial.
Thus, the CRA planned to assess the numbered company GST/HST of $1,875,000. The CRA would not assess interest or penalties against the numbered company from March 2020 to the assessment date because the audit had taken more than two years.
According to Ms. Murphy, beginning in March 2019, the appellant had been erroneously paying GST/HST of $323,850 on rent payments to the numbered company, as the supply of residential rental units was exempt. She suggested filing a rebate application under s. 261(1) of the ETA.
In July 2022, the appellant applied for a rebate of $323,850 for all GST/HST paid in error relating to the lease. By that time, over two years had passed since the appellant’s erroneous payment of certain GST/HST amounts.
Section 261(3) of the ETA imposed a two-year limitation period for rebate applications regarding GST/HST paid in error.
In May 2023, the minister of national revenue’s assessment allowed a $240,000 rebate for GST/HST paid in error under s. 261(1) of the ETA, but denied an $83,850 rebate for GST/HST erroneously paid under s. 261(3) of the ETA.
The denied amount corresponded to the GST/HST payments more than two years before the filing of the rebate application. The appellant challenged the minister’s assessment under the ETA.
Denial upheld
The Tax Court of Canada dismissed the appeal of the assessment under s. 261(3) of the ETA. The court awarded no costs.
According to the court, the minister correctly denied the $83,850 GST/HST rebate because the appellant failed to file the rebate application within two years of erroneously paying that total amount.
The court noted that s. 296(2.1) of the ETA permitted the set-off of an allowable GST/HST rebate against any net tax or overdue amount payable. However, the court found that the appellant lacked a net tax or an overdue amount payable against which the minister could set off the $83,850 rebate.
The court acknowledged that the appellant delayed applying for a rebate to recover the erroneously paid GST/HST because the CRA brought up the error over two years after the start of the relatively simple and straightforward audit, given the pandemic and the assignment of three auditors.
The court referred to s. 23(2) of the Financial Administration Act, 1985, which allowed Cabinet, on the minister’s recommendation, to remit tax if it considered the collection unreasonable or unjust.
Here, the court accepted that applying the law to the facts might have produced an unreasonable and unjust result. As it could not order the minister to make a recommendation, the court simply raised the possibility of the appellant applying for the remission of the GST/HST paid in error.
