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GST/HST — Cancelling interest on "wash transaction"

My two clients were sales representatives who worked for a store that sold appliances. Several appliance manufacturers paid extra commissions or allowances to sales reps who sold their brands of appliance. These were arranged through an "incentives" agent that handled the payments, and were unrelated to the sales reps' salary and commissions from the store that employed them.

My clients were both very successful and had substantial revenues from these incentives. The manufacturers issued T4As to them, and they reported these revenues for income tax purposes and paid tax on them.

The CRA audited my clients for GST/HST, concluded that they had failed to collect and remit substantial amounts of HST, and assessed them. The clients and their accountant then came to me for advice about appealing the assessment. They had also asked the incentives agent about getting payment of the HST, but had been given the runaround.

I advised the clients that the assessments were correct and should not be appealed, but that they could recover the HST from the manufacturers, and I helped them do that successfully. I also helped them apply for relief from the CRA under its "wash transaction" policy, to cancel most of the interest charged to them (something the auditor should have done and failed to do).

Unfortunately, the request I made to the Audit section was sent to the CRA's Taxpayer Relief section, which did not understand the "wash transaction" policy and refused to cancel interest under the regular Taxpayer Relief policy.

I filed a request for a Second Administrative Review, explaining in detail that Taxpayer Relief had misunderstood my earlier request and had not correctly applied CRA policy.

Finally the CRA got it right, and cancelled most of the interest under the "wash transaction" administrative policy.

Problem solved!