Section 280.1 Penalties and Subsection 296(2.1) - Allowance of Unclaimed Rebates
Section 280.1 of the Excise Tax Act, R.S.C., 1985, c. E-15 (“ETA”) imposes a penalty when a person fails to file a Part IX return (GST/HST net tax return) by the applicable deadline. The penalty consists of two components:
- an initial penalty of 1% of the amount required to be remitted or paid that remains unpaid on the filing deadline; and
- an additional 0.25% for each complete month that the return remains outstanding, up to a maximum of 12 months.
Section 238 establishes the applicable filing and payment deadlines.
When is the Return Due?
In general, according to section 238 of the ETA, monthly and quarterly filers must file their returns and remit any net tax owing within one month after the end of the reporting period. Annual filers generally have three months, although different rules can apply in particular circumstances, including to individuals carrying on a business.
For a person who is not a registrant but is subject to a deemed self-supply, subsection 238(2) generally requires the return and payment to be made by the end of the month following the month in which the tax became payable. A failure to meet the applicable deadline can result in a penalty under section 280.1.
Effect of Rebates on the Penalty
The amount used to calculate a section 280.1 penalty is not necessarily the taxpayer’s gross tax liability. Where the taxpayer is entitled to an allowable rebate, the rebate may reduce the amount on which the penalty is calculated.
This issue was considered by the Federal Court of Appeal in Canada v. Villa Ste-Rose Inc., 2021 FCA 35. The Court considered the meaning of “amount” for purposes of section 280.1 and concluded that the calculation must take into account rebates to which the taxpayer was entitled. Otherwise, a taxpayer who filed a late return and claimed an available rebate could face a greater penalty than a taxpayer who did not file a return and instead waited for the Minister to assess the tax.
The ETA provides two relevant mechanisms for bringing rebates into the calculation.
Subsection 228(6)
Subsection 228(6) applies where a person files a Part IX return showing an amount to be remitted and also claims a rebate. The rebate may be claimed in the return, in a separate return, or through an accompanying application.
Where the statutory requirements are satisfied, the Minister is deemed to have paid the lesser of the amount required to be remitted and the rebate on account of the rebate. The effect is to reduce the amount payable at the relevant time.
Subsection 296(2.1)
Subsection 296(2.1) addresses a different situation: an allowable rebate that was not claimed before the Minister assessed the taxpayer’s net tax.
In United Parcel Service Canada Ltd. v. Canada, 2009 SCC 20, the Supreme Court confirmed that the Minister may apply an unclaimed rebate against an amount owing where the statutory requirements are satisfied. In particular:
- the Minister determines in the course of an assessment that an amount would have been payable as a rebate had the rebate been claimed;
- no application for the rebate was filed before the notice of assessment was issued; and
- the rebate would have been payable if an application had been filed on the date of the assessment, or would have been payable but for the expiry of the applicable limitation period before that date.
Where those requirements are met, subsection 296(2.1) treats the rebate as though it had been paid or remitted on the original filing deadline.
The timing of the rebate determination does not necessarily prevent subsection 296(2.1) from applying. In Fadali v. The King, 2026 TCC 86, the Tax Court considered the provision in circumstances where the rebate was confirmed after the initial assessment. The important question remains whether the statutory requirements for an “allowable rebate” are satisfied.
Defences and Relief
A section 280.1 penalty is not necessarily the end of the matter. Depending on the circumstances, a taxpayer may have grounds to seek relief.
Taxpayer relief. Section 281.1 gives the Minister discretion to waive or cancel penalties and interest in appropriate circumstances, subject to the applicable requirements and time limits. Relief may be considered in circumstances involving factors such as extraordinary circumstances, CRA errors or financial hardship. It is discretionary rather than an entitlement.
Voluntary Disclosures Program. The Voluntary Disclosures Program (“VDP”) may also provide relief for certain past GST/HST errors. GST/HST Memorandum 16-5-1 sets out the applicable requirements and distinguishes between unprompted and prompted disclosures. Depending on the circumstances, a qualifying unprompted disclosure may result in full penalty relief and a 75% reduction in interest, while a qualifying prompted disclosure may provide penalty relief and a smaller interest reduction.
The VDP has specific eligibility requirements. Among other things, the disclosure generally must be at least one year overdue, complete and voluntary, and must involve an error or omission. The taxpayer must also not be under audit or investigation in respect of the same matter.
Conclusion
A section 280.1 penalty should not necessarily be accepted without reviewing the underlying calculation. In particular, any allowable rebate should be considered when determining the amount on which the penalty is based. Depending on the circumstances, the taxpayer should also consider whether subsection 296(2.1), taxpayer relief, the VDP, or another available remedy may apply.
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