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GST — interest reduced to reflect offsetting rebate

A public college bought three parcels of real estate for some $17 million. Because it was GST-registered, it did not pay GST to the vendor on closing. Instead, it was required to self-assess the GST and pay it directly to the CRA. However, it was also entitled to a matching 67% rebate that eliminated 2/3 of the GST.

The college overlooked this obligation, and made the payment some 15 months late for one property, and about a month late on the other two properties.

The CRA assessed interest on the total GST owing of some $900,000 from the date it became payable, even though $600,000 of that amount was eligible for an offsetting rebate. Interest was compounded daily on the unpaid tax from when it was first payable, while the rebate was not credited until the day the return was filed.

The college filed a Notice of Objection, and a CRA Appeals Officer confirmed the assessment of interest.

At this point I was asked to look at the issue. I recommended an appeal to the Tax Court of Canada, which I handled.

In Court, I argued that the application of interest to the pre-rebate amount was absurd. When the GST was designed in 1989, the rebate mechanism was created as a way to impose (at the time) 2.3% tax instead of 7% tax on public colleges. The 7% tax was simply a calculation mechanism to get to the "real" tax rate that was supposed to apply. Interest should therefore not be imposed on the nominal high GST rate that was never intended to be the college's GST rate.

I made other technical arguments as well, including pointing out that if the college had not reported the GST at all but had been assessed by the CRA, it would be entitled to apply the rebate as of the date the tax was owing.

The Tax Court allowed the appeal, agreeing with my argument that it was absurd for the college to be penalized for complying with the legislation by reporting the GST.

Thus, interest ran only on the net amount owing after the rebate.

Problem solved!

(The case is reported at 2013 TCC 146.)

(2013)