GST/HST registrants who commonly make zero-rated supplies often file a return claiming a net tax refund, relying on the prompt payment of that refund in order to finance their businesses. The minister is required to pay the refund "with all due dispatch" (ETA section 229). However, where the return is selected for audit prior to assessment, there is often a delay of months, or even years, while the CRA audits the return to ensure that the refund is in fact payable (perhaps appropriately for the management of the public purse). Recent attempts to compel the CRA to pay the net tax refund through a court granting a writ of mandamus have been unsuccessful, apparently because the time taken for the audit was not considered unreasonable (see Iris Technologies Inc., 2020 FC 532; aff'd 2020 FCA 117; and Express Gold Refining Ltd., 2020 FC 614). On the other hand, a mandamus application can cause the minister to assess the applicant, which at least allows the taxpayer to file of a notice of objection.
Apotex ( [1994] 1 FC 742) sets out a six-part test for a mandamus application. One notable requirement is that there be a clear right to performance of the public legal duty to act (in this context, pay the refund). This requires consideration of whether the applicant has satisfied all conditions precedent giving rise to the duty, and whether there was (1) a prior demand for performance of the duty; (2) a reasonable time to comply with the demand unless refused outright; and (3) a subsequent refusal, which can be either expressed or implied (for example, by an unreasonable delay).
In Express Gold, the mandamus application was made just a few months after the return was filed and only two months after the CRA commenced the audit. The court found that because of the complexity and scope of the audit—the registrant's scrap gold (and other metals) business involved a high volume of transactions with multiple third parties—the application was made prematurely. Importantly, the court found that section 229 of the ETA does not create a "pay first, audit later" regime.
Similarly, in Iris Technologies, the FCA agreed with the reasons in Express Gold stating that the obligation to pay a net tax refund "with all due dispatch" does not displace the minister's obligation to verify that the refund is in fact payable under the ETA; section 229 does not create a "pay now and ask questions later" system. The court was not swayed by evidence of the serious impact that the CRA's delay in paying the refund had on the registrant's commercial activities. However, the court noted that an application might be viewed more favourably where the audit is not completed on a timely basis owing to an "ulterior purpose or . . . bad faith."
An example of bad faith is McNally ( 2015 FC 767), where the minister admitted that the main reason for the delay in assessing the taxpayer's income tax return was to discourage other taxpayers from participating in a particular charitable tax donation scheme that it found objectionable. The court granted the mandamus application, requiring the CRA to process the return.
A second successful mandamus application is Nautica Motors ( 2002 FCT 422). Evidence showed that net tax refunds were withheld for some of the reporting periods under audit for several years as the audit continually expanded to include additional reporting periods. The court granted the mandamus application insofar as to compel the minister to process the GST/HST return, but the request to compel the minister to pay the refund was denied.
Originally Published by Canadian Tax Foundation, November 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
