The Canada Revenue Agency (CRA) outlines its stance on accepting a due diligence defence against penalties for non-compliance with the Excise Tax Act (ETA).

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Here's a simplified overview of the key points:

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What is Due Diligence?

• Definition: Due diligence refers to the reasonable efforts made by a person to comply with tax obligations.
• Context: In the case of GST/HST, due diligence can be used to contest penalties for late payments or failure to file returns.

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Key Sections of the Excise Tax Act

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1. Subsection 280(1):

• Imposes a 6% annual penalty for failure to remit or pay GST/HST amounts when required.

• Interest is also charged at a prescribed rate.

2. Section 280.1:

• Imposes penalties for failing to file returns, calculated as:

• 1% of the outstanding amount, plus

• 25% of that amount for each month overdue, capped at 12 months.

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CRA's Position on Due Diligence

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• The CRA does not explicitly allow for a due diligence defence under subsections 280(1) and 280.1, but it can be accepted in certain circumstances.
• The CRA may cancel or waive the penalties if a person demonstrates due diligence.

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Requirements for Establishing Due Diligence

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• Evidence of Efforts: The burden is on the individual to prove they exercised due diligence.
• Sincere Attempts: Efforts must reflect what a reasonable person would do in similar situations.
• Specific Scenarios:

• Miscalculations based on reasonable but mistaken assumptions may be excused.

• Reliance on incorrect information may also be grounds for a defence, provided reasonable care was exercised.

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Limitations to the Due Diligence Defence

• Mathematical Errors: Simple errors in calculations typically do not qualify for a due diligence defence.
• Inadequate Records: Failure to maintain proper records will weaken a defence.
• Third-Party Advice: Sole reliance on incorrect advice from a third party may not be sufficient unless the advisor's actions support the claim of due diligence.
• Late Payments: Generally, the due diligence defence will not apply if a correct amount is paid late.

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Examples of Due Diligence Outcomes

1. Example of Rejected Defence:

• A registrant made an error in their tax calculation, resulting in a penalty. The CRA denied the due diligence defence as unintentional mistakes do not qualify.

2. Example of Accepted Defence:

• A business owner consulted various sources, including CRA officials and an accountant, about tax treatment for a product. Despite an audit finding that the product was taxable, the CRA accepted the due diligence defence due to the owner's thorough research.

3. Extreme Circumstances: If unforeseen events, like a family death, impede timely filing, the individual may still seek relief from penalties under taxpayer relief guidelines, although due diligence might not apply. This provision offers a safety net in extreme situations, providing a sense of reassurance to the reader.
4. Technical Errors:

• If a bank error delays payment, the CRA may accept the due diligence defence and cancel the penalty for late filing.

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Conclusion

Understanding the CRA's stance on due diligence is crucial for charities and nonprofits aiming to avoid or contest penalties related to GST/HSTcompliance. This knowledge empowers you to navigate penalties under the Excise Tax Act with confidence, feeling well-informed and prepared. Always keep detailed records and seek professional advice to bolster your position in disputes.

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