Late-filed real estate self-assessment: No penalties or interest for a taxpayer in a refund position

The Federal Court of Appeal has rendered its decision in Canada c. Villa Ste-Rose Inc. (2021 FCA 35). Villa Ste-Rose operates a Quebec residence for seniors who are semi-independent or losing their independence. Most of its income is GST/QST exempt and Villa Ste-Rose was not registered for sales tax purposes. After a fire destroyed the residence, Villa Ste-Rose decided to have the building rebuilt by a contractor. Throughout the construction, Villa Ste-Rose paid sales taxes on the construction costs without claiming any input tax credit (ITC) or input tax refund (ITR).  

When the tenants moved back in, Villa Ste-Rose should have self-assessed as if it had built a new building under the Excise Tax Act (hereafter “ETA”) rules and the Act respecting the Québec Sales Tax. This means that Villa Ste-Rose was required to self-assess GST/QST on the fair market value of the property. It was also entitled to a refund of GST/QST on its construction costs and a new rental property rebate.

Villa Ste-Rose found out about its tax liability a few months later after consulting a GST/QST specialist  and wanted to regularize its tax file. It filed  late its self-assessment, along with its refund claims. The allowable refunds were higher than the GST/QST remittable on the self-assessment. Revenu Québec calculated interest and penalties as of the date on which the taxes should have been remitted and granted the refunds as of the date on which the claims were filed. Villa Ste-Rose was charged penalties and interest even though it was in a refund position. In recent years, many others have unfortunately learned the same lesson, at their expense, after filing their self-assessment late even if they were in a refund position.

Villa Ste-Rose filed an appeal with the Tax Court of Canada. In her decision, Judge D’Auray considered that subparagraph 228(6) of the ETA applied and the GST remittable should be offset by allowable refunds for the calculation of interest and penalties. Similar measures apply in respect of the QST. 

A similar decision had been rendered in 2013 in Humber College Institute of Technology & Advanced Learning. This case had been heard under the informal procedure and was not precedent-setting. Both Tax Court of Canada judges reached the same conclusion: a taxpayer who files a late self-assessment is at a disadvantage compared to taxpayers who simply wait for the tax authorities to assess them.

In the course of an audit, the tax authorities are required to apply any unclaimed tax credits and refunds against any assessment. Interest and penalties must be calculated on the amount of tax assessed, which works in favour of non-filers.

The Federal Court of Appeal upheld the Tax Court of Canada’s decision on the calculation of interest and penalties on a late-filed self-assessment. The calculation of interest and penalties must take allowable refunds into account; otherwise, the result will fail to reflect the legislator’s intention. Common sense finally prevailed!

Benoit Vallée CPA, CGA
Partner, Indirect Taxes
Demers Beaulne LLP