A Small Victory for Common Sense :CRA SOTW
Alan Baggett
Taxman shouldn't bite the hand that feeds
Home Depot's tax appeal is one small victory for common sense amid a
bureaucratic tax system grown horribly and needlessly complex
Neil Reynolds - Friday, Jun. 05, 2009 12:00AM EDT
The facts of the case, Home Depot v. The Queen, were not in dispute.
Tax Court of Canada Judge Campbell J. Miller summarized them
efficiently last week when he rendered judgment.
"Home Depot of Canada Inc. collects and remits GST for the Government
of Canada," Judge Miller noted. "Since 2005, it has contracted out its
GST compliance requirements to Deloitte Tax LLP, a U.S.-based
organization in the business of completing and remitting sales tax
forms and payments for major organizations across North America.
"With two exceptions, Home Depot has filed on a timely basis and has
remitted a great deal of money. The two exceptions were the November
2005 filing (due at the end of December) and the January 2006 filing
(due at the end of February). Due to a clerical error, Deloitte Tax
sent the returns to the Canada Revenue Agency at an incorrect address.
"When this [error] was discovered, in March and September
respectively, Home Depot immediately took steps to file and to pay,
and did so in March and September, 2006.
"The Canada Revenue Agency assessed late-filing penalties pursuant to
subsection 280 of the Excise Tax Act in the amounts of $77,097 and
$326,223 for the periods in question."
In essence, the CRA hit Home Depot with a penalty of more than
$400,000 because the company that Home Depot hired to process its tax
remittances made a clerical error.
Ladies and gentlemen of the jury, how do you find?
On the one hand, you have a company with an impeccable record of
collecting taxes on behalf of the federal government - and two cheques
sent by overnight courier to a wrong address. One of the misguided
cheques was for $5-million, the other for $9.5-million. And you have
prompt fixing of the mistakes.
On the other hand, you have subsection 280 of the Excise Tax Act,
which authorizes the CRA to impose penalties on any company that
misses a deadline, regardless of the reason.
Much of the evidence in Home Depot's appeal dealt with Deloitte Tax's
procedures for handling GST returns. The legal issue was this: Does
any error whatsoever constitute incompetence? Does it constitute
negligence? Senior Deloitte Tax executives testified that the company
assigned its most experienced team to the Home Depot file because it
was such an important client.
Deloitte is the largest tax compliance company on the continent and
provides its service to 160 major corporations, 20 of them Canadian.
It employs scores of professional and clerical staff to prepare and
file the returns of its Canadian clients alone. For Home Depot in
North America, the company files 730 separate tax returns a month -
8,760 a year. (Home Depot's tax lawyers are an entirely separate
operation.) Judge Miller described the company as "a well-oiled sales-
tax-remitting machine."
The CRA normally rejects due diligence - or doing one's best - as an
argument by corporate taxpayers, a practice that Judge Miller
suggested amounts to a requirement for perfection. "Even in the best
system," he observed, "there is room for human error."
His judgment in favour of Home Depot was straightforward - and
comforting. It's reassuring to know that common sense can still,
occasionally, prevail against an expansive bureaucracy. A few excerpts
from his ruling: "Here is a corporate taxpayer, remitting millions of
dollars monthly to the government, and paying experts to do so, to
meet the collection obligations imposed on it by the government.
"A clerk mistakenly addresses two remittances. Once Home Depot
discovers its error, it immediately re-remits. It pays interest.
"What does the Canada Revenue Agency do? It imposes a half-million-
dollar penalty and then pursues the matter through the litigation
process to a trial.
"A step back for a balanced look by a CRA official, exercising a good
dose of commercial common sense, should not have resulted in the
relentless pursuit of a half-million-dollar penalty. Yes, the Act
stipulates that taxpayers are to be penalized for remitting late - but
do not bite the hand that feeds you when the hand tries so diligently
to ensure that you get every mouthful.
"It is easy to be critical of behavior after an error has been
committed. In considering whether a taxpayer acted with due diligence
to minimize the possibility of error, one can always find something
else that the taxpayer might have done. But that is not the test. The
test is whether what the taxpayer in fact did was sufficient
reasonable precaution - not that the taxpayer did not hold the hand of
the employee [who made the mistake] throughout every single task, no
matter how menial, although Deloitte Tax went a long way to doing
exactly that."
Judge Miller upheld Home Depot's appeal and cancelled the fines - one
small victory for common sense amid the intellectual bewilderment and
regulatory confusion inherent in a bureaucratic tax system grown
horribly and needlessly complex.
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