Subsection 296(2.1) of the Excise Tax Act & Unclaimed GST/HST Rebates
Subsection 296(2.1) of the Excise Tax Act, R.S.C., 1985, c. E-15 (“ETA”) allows the Canada Revenue Agency (“CRA”), in certain circumstances, to recognize an eligible GST/HST rebate that was not formally claimed by a taxpayer.
The provision serves as an important statutory mechanism. Subsection 296(2.1) authorizes the CRA to take an allowable but unclaimed GST/HST rebate into account when assessing or reassessing a taxpayer’s liability under Part IX. Instead of requiring a separate rebate application before the assessment is completed, the CRA may apply the rebate against the taxpayer’s liability if the legislative conditions are met. The provision helps ensure that taxpayers are assessed according to their correct net GST/HST liability, rather than paying tax that could have been offset by an available rebate.
United Parcel Service Canada Ltd. v. Canada, 2009 SCC 20
In the decision of United Parcel Service Canada Ltd. v. Canada, 2009 SCC 20, the Supreme Court of Canada (”SCC”) held that subsection 296(2.1) requires the CRA to take into account an allowable but unclaimed rebate when assessing or reassessing a taxpayer, even when a rebate application was not filed within the ordinary limitation period, provided the statutory requirements of the provision are met. According to the SCC at para. 30:
Even if no application for a rebate was made within the applicable limitation period, the rebate shall be applied by the Minister against the net tax owed by the taxpayer in the reassessment process if the Minister determines that a rebate would have been payable had it been claimed. The section refers to “allowable rebate”. Allowable rebate must mean a rebate that would have been allowable had the applicable procedure been followed. In other words, where these procedures have not been followed, it is not fatal to the rebate claim.
Why was Subsection 296(2.1) introduced?
GST/HST legislation contains dozens of rebate provisions covering situations such as:
- GST/HST paid in error;
- Public service body rebates;
- Selected housing rebates;
- Rebates for certain charities and public institutions; or
- Other statutory rebates under Part IX of the Excise Tax Act.
In practice, taxpayers occasionally fail to submit the required rebate application prior to a CRA audit or reassessment. Without subsection 296(2.1), the CRA could assess additional GST/HST while ignoring an existing rebate entitlement, resulting in increased GST/HST owing. The provision reduces this inequity by allowing the recognition of qualifying rebates during the assessment process.
How does Subsection 296(2.1) work?
As an example, during an audit, CRA will review the taxpayer’s reported GST/HST. If the auditor determines that:
- additional GST/HST is payable, and
- the taxpayer qualified for a rebate that was never claimed,
the CRA may reduce the assessment by the amount of the allowable rebate. The rebate effectively offsets the taxpayer’s liability, subject to the statutory limitations contained in the Excise Tax Act.
Legislative Requirements
A Valid Rebate Must Exist
The taxpayer must have been legally entitled to the rebate under the Excise Tax Act.
The Rebate Must Not Have Been Claimed
Subsection 296(2.1) deals specifically with unclaimed rebates. If the taxpayer has already filed a rebate application, this provision generally has no further application.
The CRA Must Be Assessing the Taxpayer
The provision operates only in the context of an assessment or reassessment by the Minister. It does not create a standalone right to claim a rebate outside that process.
Legislative Conditions Must Be Satisfied
Each rebate has its own eligibility rules. Subsection 296(2.1) does not eliminate the substantive eligibility requirements or evidentiary obligations applicable to the underlying rebate.
Importance during GST/HST Audits
For businesses facing CRA audits, subsection 296(2.1) can have a substantial financial impact. Experienced tax advisors reviewing an assessment should consider whether:
- any GST/HST rebates were overlooked;
- documentary evidence supports entitlement;
- the taxpayer was legally entitled to the rebate; and
- the requirements of subsection 296(2.1) have been satisfied.
Identifying an unclaimed rebate can significantly reduce a proposed re/assessment.
Conclusion
Subsection 296(2.1) of the ETA is an important provision that allows the CRA to recognize certain unclaimed GST/HST rebates during an assessment or reassessment. For businesses undergoing a CRA GST/HST audit, subsection 296(2.1) should not be overlooked. While it is not a replacement for proper filing procedures, it can substantially reduce an assessment when an eligible rebate has been missed.
SpenceDrake Tax Law – Tax Lawyers
Disclaimer
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