Scenario: A small corporation has been reassessed by the Canada Revenue Agency (CRA) for income tax, but the owner missed the 90-day deadline (plus the one-year extension) to file a notice of objection. Normally, missing this deadline means the tax debt is final and unchallengeable by the corporation. Faced with an unpayable tax bill, the owner puts the corporation into bankruptcy. What happens next, and is there any way to dispute the tax debt now?

Section 160 – Liability for Transfers to Non-Arm’s-Length Parties

Generally, when a tax debtor transfers property to a related or non-arm’s-length recipient for less than fair market value, section 160 of the Income Tax Act (Canada) (ITA) allows CRA to pursue the recipient for the transferor’s tax debt. In effect, the recipient becomes liable for the tax debt up to the lesser of the value of the transferred asset (minus the consideration received by the transferor) and the amount of the tax debt. For example, if a corporation owing taxes paid a dividend or transferred an asset to its shareholder (a non-arm’s-length person) without equivalent consideration, CRA can generally assess the shareholder personally under section 160 for the corporation’s income tax arrears (to the extent of the undervalued transfer). The shareholder and the corporation are then jointly and severally liable for that amount.

In our scenario, once the corporation is bankrupt (and cannot pay its tax debt), CRA often turns to such derivative assessments. The business owner might receive a section 160 assessment holding them personally liable for the corporate tax debt, especially if they received any funds or assets from the company for little or no consideration.

Defending a Section 160 Assessment – Contesting the Tax Debt

Importantly, being assessed under section 160 gives the individual a fresh chance to dispute the underlying tax debt. The section 160 assessment is a separate assessment against the transferee (the owner), who has their own right to object and appeal. Canadian courts have confirmed that a person assessed under section 160 must have a full right of defence to challenge the assessment made against the person, including an attack on the primary corporate assessment on which the person’s assessment is based. In other words, even though the corporation missed its objection deadline, the transferee can still argue that the corporation did not actually owe the amount of tax in the first place.

When responding to a section 160 assessment, several defences can be raised, including (but not limited to):

• No Tax Debt or Lower Tax Debt: The original taxpayer (e.g. the corporation) did not owe the assessed taxes – meaning the underlying tax assessment was incorrect. This is effectively challenging the basis of the tax debt.
• Valid Consideration: The transfer in question was not a gift or below-value transfer (for example, it was repayment of a loan or the recipient paid fair market value), so section 160 should not apply.
• Overstated Value: The property’s value was lower than the CRA assumed, reducing the transferee’s liability.

If any of these succeed, the section 160 assessment can be reduced or eliminated. Notably, lack of knowledge of the tax debt is not a defence – liability under section 160 can apply even if the transferee was unaware of the tax owing.

Practical Takeaways

This strategy – letting the corporation go bankrupt and dealing with a section 160 assessment – is a last resort. It underscores a peculiar quirk of tax law: a related-party recipient can get their “day in court” on the original tax issue, even if the primary taxpayer lost that right. However, invoking this strategy is risky and can lead to personal liability. The better course is always to file timely objections to tax assessments to avoid such predicaments. If you do find yourself facing a section 160 assessment after a missed objection, seek professional tax advice.

What it is: Canada’s Goods and Services Tax (GST) is a value-added tax of 5% on most supplies made in Canada. In participating provinces, an extra provincial component applies (the HST); zero-rated supplies are taxed at 0%, and exempt supplies are outside the tax and typically don’t allow input tax credits (ITCs). The Act places the tax on the recipient, and registrants must charge, collect, and remit it.

1) Do I need to register?

• Small supplier rule: If your total taxable revenues (worldwide, including associates) are ≤ $30,000 in the last four consecutive calendar quarters or in a single quarter, you’re a small supplier and do not have to register. Exceeding $30,000 means you cease to be a small supplier at that time.
• Mandatory registration: Once you are no longer a small supplier, you must register (generally within 30 days of first making a taxable supply not as a small supplier).
• Voluntary registration: You may register earlier (useful if you want to claim input tax credits).
• CRA’s step-by-step on when to register and when you start charging GST/HST is here.

2) What do I charge customers?

• Rates: Charge 5% GST or the applicable HST rate based on place-of-supply rules; zero-rated items (e.g., many basic groceries) are taxed at 0%; exempt supplies (e.g., many health, education, financial services) are not taxed. See CRA’s rate and place-of-supply guidance.

3) How do input tax credits (ITCs) work?

If you’re registered, you generally recover the GST/HST paid on business inputs by claiming ITCs in your return (subject to documentation/timing rules). See section 169 of the Excise Tax Act (Canada) (ETA) and CRA’s ITC overview.

4) Filing, remitting, and deadlines

• Net tax = GST/HST collected − ITCs: The ETA defines net tax in section 225.
• File & remit: Returns are filed and net tax is remitted under section 228 of the ETA.
• How often do I file? CRA assigns a reporting period based on your prior-year annual taxable supplies: ≤ $1.5M: Annual; >$1.5M to ≤ $6M: Quarterly; > $6M: Monthly. You can elect to file more frequently.
• Due dates:
  • Monthly/Quarterly: Return and payment due 1 month after the period end.
  • Annual: Filing 3 months after fiscal year-end; payment timing depends on whether you have business income and your year-end (e.g., many December 31 filers: payment Apr 30, file by Jun 15). See CRA’s deadline page here.
• Instalments (annual filers): If last year’s net tax ≥ $3,000, you may need quarterly instalments in the current year.

5) Records, invoices, and penalties

• Keep records: CRA requires you to keep GST/HST records (including support for ITCs) for 6 years from the end of the year to which they relate.
• Late filing/late payment: CRA may assess penalties and interest if returns or amounts aren’t received by the due date; penalties for late filing are provided under the ETA (e.g., section 280.1) and explained on CRA’s site.

The RC4288, Request for Taxpayer Relief – Cancel or Waive Penalties or Interest, is the CRA’s built-in safety valve. If you fell behind on your tax obligations because of events outside your control, serious financial hardship, or CRA’s own delays or mistakes, this is the form you use to ask the CRA to cancel or reduce penalties and interest.

This guide walks you through:

• Who actually qualifies (and who doesn’t)
• The 10-year deadline most people miss
• How to complete a strong, well-documented application
• What happens after you apply – including second reviews & judicial review
• Where a tax lawyer makes a real difference

1. What Is CRA Form RC4288?

Form RC4288 is the CRA’s standard form for a written request asking the Minister (through CRA officials) to:

1. Cancel or waive penalties, and/or
2. Cancel or waive interest on tax debts

It can be used by:

• Individuals
• Corporations
• Trusts
• Partnerships

Importantly:

• You’re asking for relief from penalties and interest – not from the underlying tax itself. The tax debt usually still has to be paid. In very rare cases, separate “remission orders” can relieve tax itself, but that’s a different, extraordinary process.
• You don’t technically have to use RC4288 – a detailed letter can also be a valid taxpayer relief request – but the CRA’s own procedures manual assumes RC4288 or equivalent written details, so using the form is strongly recommended.

2. The 10-Year Deadline You Cannot Miss

The taxpayer relief rules are subject to a strict 10-year rolling limitation period. You generally have 10 years from the end of the calendar year in which the interest accrued or penalties came into existence to ask for relief.

If your first RC4288 request for a particular year is outside that 10-year window, the CRA considers it invalid and will send it back – they legally cannot grant relief.

3. Who Can Apply for Taxpayer Relief? (The Real Eligibility Test)

The CRA’s internal guidelines say penalties and interest may be cancelled or waived in four main kinds of situations:

1. Extraordinary circumstances
2. Actions of the CRA
3. Inability to pay / financial hardship
4. Other circumstances, including some third-party or bank errors

The CRA is also required to consider other reasonable circumstances – their discretion is not limited to a rigid checklist.

Let’s unpack these.

4.1 Extraordinary Circumstances

These are events beyond your control that made it impossible or unreasonable to comply. CRA examples include:

• Natural or human-made disasters – flood, fire, major storms
• Serious illness or accident
• Death, serious illness, or accident in the immediate family
• Serious emotional or mental distress (marital breakdown, job loss)
• Civil disturbances or strikes that disrupt normal services

What CRA officers look for:

• Do the dates and details of the event line up with when you missed your obligation?
• How exactly did the event prevent you from filing or paying on time?
• Did you consider other ways to comply (e.g., using online services, authorizing a representative)?
• Are there supporting documents (police/fire reports, medical records, insurance claims, etc.)?

4.2 Actions or Delays by the CRA

The CRA can grant relief where:

• There were undue delays in processing an audit, objection, or appeal
• The CRA made errors, gave incorrect written information, or failed to notify you of an amount owing within a reasonable time
• CRA actions caused compounded interest to build up over a long period

4.3 Inability to Pay / Financial Hardship

Financial hardship isn’t just “this is inconvenient.” CRA looks for situations where, even with genuine effort:

• You have made bona fide efforts to pay down the debt over time
• But interest and penalties absorb a significant portion of each payment
• The arrears are so onerous relative to what you can realistically pay that it would be very difficult, if not impossible, ever to clear the account

For individuals, CRA often asks you to complete Form RC376 – Statement of Income and Expenses and Assets and Liabilities, then the CRA:

• Reviews your income and essential expenses (housing, food, utilities, medical, etc.)
• Distinguishes essential vs non-essential spending
• Analyzes your net worth and ability to borrow or liquidate assets

They then determine whether you truly cannot reasonably pay, or whether the issue is more about prioritization.

4.4 Third-Party Errors and Bank Mistakes

The default CRA position: you are generally responsible for your accountant, bookkeeper, or payroll provider’s errors.

However, the CRA manual on taxpayer relief confirms:

• CRA must consider other reasons, including third-party errors, and cannot deny relief simply because circumstances are “not extraordinary.”
• Relief may be appropriate where the representative faced an extraordinary event (e.g., sudden hospitalization) that prevented filing.
• Bank errors or delays (e.g., funds remitted on time but delayed by the bank’s system) may justify cancelling penalties/interest if the bank confirms the mistake.

Because CRA is cautious here, third-party error cases usually need careful framing and strong documentation.

5. What Penalties & Interest Can Be Waived?

RC4288 relief can target most interest and penalties assessed under the Income Tax Act (Canada) and Excise Tax Act (Canada), including:

• Late filing penalties – income tax, GST/HST, information returns
• Failure to remit penalties – payroll source deductions, GST/HST remittances
• Interest on unpaid tax, penalties, and some elections-related penalties (e.g., late-filed or amended elections)

But:

• It does not cancel the underlying tax (except via separate remission process, which is rare).
• It cannot be used to dispute the correctness of an assessment or penalty – that must be done through a notice of objection and, if needed, appeals.

6. How to Fill Out Form RC4288 (Step-by-Step)

Step 1 – Identify Yourself and Your Account

Complete the appropriate section:

• Individuals: Full legal name, SIN, current address, phone
• Businesses: Legal name, Business Number (BN), program accounts (e.g., RP, RT, RC)
• Trusts: Trust name and Trust Account Number

Make sure the contact information matches CRA’s records.

Step 2 – Specify the Type of Relief

The form will ask what you’re requesting relief for. Common boxes to tick:

• Penalties
• Interest
• Both penalties and interest

You must also list the years or reporting periods involved for each account (T1, T2, GST/HST, payroll, etc.).

Step 3 – Explain Your Circumstances (This Is the Heart of Your Application)

This is where strong applications distinguish themselves.

Your explanation should:

1. Tell the story chronologically
   • What happened
   • When it happened
   • How it affected your ability to file or pay
2. Connect the dots for CRA
   • Link specific events (e.g., hospitalization dates, disaster dates, CRA delays) to specific missed deadlines or periods
3. Show responsible behaviour
   • Efforts to comply despite the problem (extensions requested, partial payments, attempts to contact CRA)
   • Evidence of improved compliance – filing on time now, current payments up to date
4. Address financial hardship (if applicable)
   • Outline income, essential expenses, debts and assets (often via RC376)
   • Explain why, even with a reasonable payment plan, the interest/penalty component makes repayment unrealistic

Step 4 – Attach Supporting Documentation

Examples of helpful documents:

• Medical records, hospital discharge summaries, doctor’s letters
• Death certificates, funeral documentation
• Police, fire or insurance reports for disasters or theft
• Bank letters acknowledging errors or delays
• Correspondence with CRA showing delays, errors or incorrect information
• Financial documents (RC376, bank statements, income statements, tax returns, payment history)

The CRA’s own manual stresses that complete requests allow officers to exercise discretion properly and avoid delays.

Step 5 – Sign and Submit

• Ensure the form is signed by the taxpayer or an authorized representative (with valid authorization on file).
• Submit the RC4288 and supporting documents:
  • By mail to the appropriate CRA Tax Centre (address on the form); or
  • By uploading through CRA My Account / My Business Account (if available), selecting the “Submit documents” option for taxpayer relief.

7. How Long Does CRA Take to Process RC4288?

In practice, CRA relief reviews commonly take several months, and complex or hardship-heavy files can take longer.

Internally, files are categorized by complexity and processed through “first review” and “second review” levels. Complex cases (e.g., multiple years, memorandum assessments, financial hardship plus CRA action) are treated as higher complexity workloads.

While you wait:

• Keep filing current returns on time
• Make reasonable payments toward your balance where possible – this supports hardship arguments and shows good faith.

8. What Happens After You Submit Form RC4288?

8.1 First Review

Your first application for a given year/issue goes through a first review. This covers:

• The first time you’ve asked for relief for that year/period and penalty/interest; or
• Additional information submitted before a decision is made; or
• Clarifications requested by CRA during their review

At the end of the first review, CRA will issue a written decision letter, which may:

1. Approve full relief – all specified penalties and/or interest are cancelled
2. Approve partial relief – only certain years or amounts are reduced
3. Deny relief – no change to penalties or interest

Adjustments are then processed on the relevant CRA systems (e.g., T1, T2, GST/HST) and reflected on your account.

8.2 Second Review (Internal Appeal)

If you disagree with the first decision, you can ask for a second review. This is another discretionary review, typically by a different officer or team. You can request a second review whether or not you have new information or arguments – but new, well-framed information helps.

8.3 Judicial Review in Federal Court

There is no formal appeal to the Tax Court for taxpayer relief decisions. Instead, if you believe CRA misused its discretion (e.g., ignored relevant facts, applied rigid rules, or misunderstood the law), you can seek judicial review in Federal Court.

Important:

• The Court doesn’t simply “re-decide” your relief request. It reviews whether CRA exercised its discretion reasonably and fairly.
• If the Court finds problems, it normally sends the matter back to CRA for a new decision by a different official, with directions to consider the file properly.

9. Common Reasons RC4288 Requests Fail

From both practice and CRA’s own guidance, we see the same pitfalls again and again:

• Missing the 10-year deadline for a first request
• Using RC4288 to argue what should be argued in a Notice of Objection
• Providing vague explanations (“had personal issues,” “business was slow”) with no dates or detail
• Failing to connect events to specific missteps (e.g., which year’s return was late and why)
• Claiming financial hardship but providing no financial disclosure or clearly non-essential spending patterns
• Relying solely on “my accountant messed up” without explaining why relief is still fair in your particular case

10. How a Tax Lawyer Can Strengthen the RC4288 Application

A well-prepared RC4288 package is part law, part accounting, and part storytelling. At Taxpayer Law, we help by:

• Assessing eligibility:
  • Identifying which years are still within the 10-year window
  • Determining whether your facts align with CRA’s categories (extraordinary circumstances, CRA actions, hardship, or other)
• Building a persuasive narrative:
  • Organizing events, timelines and evidence so the CRA officer doesn’t have to dig
  • Making sure every fact in your story ties back to specific penalties and interest
• Preparing complete documentation:
  • Drafting detailed written submissions
  • Assembling medical, financial, and third-party evidence in the way CRA expects
• Managing CRA communications:
  • Handling information requests, clarifications and follow-ups
  • Ensuring your rights are respected and deadlines aren’t missed
• Challenging unfair decisions:
  • Requesting a second review with focused new arguments
  • Pursuing judicial review in Federal Court where CRA has misapplied its discretion

11. Need Help With Form RC4288?

If penalties and interest are overwhelming you, you do have options – but relief is never automatic, and poorly prepared RC4288 requests are often denied.

If you’d like help:

• figuring out whether you qualify,
• understanding your 10-year deadline, or
• preparing a strong RC4288 application or second review,

Contact Taxpayer Law for a free consultation. We can review your CRA account, your facts, and your options – and help you put your best possible case forward for taxpayer relief.

Have you recently sold or renovated a home in Canada? You might be on the CRA’s radar for a “builder” audit — whether you think you’re a builder or not. The CRA has been aggressively targeting individuals who construct, substantially renovate, or flip residential properties and sell them, often without charging HST or properly reporting the income. In Ontario alone, real estate audits from 2015 to 2023 yielded over $300 million in GST/HST assessments, illustrating how serious the CRA is about compliance in this sector. This guide will explain what a builder audit entails, why you might be targeted, what your GST/HST obligations are, and how to protect yourself if the CRA comes knocking.

What Is a “Builder” for GST/HST Purposes?

Under Canadian tax law, the term “builder” has a specific meaning. It’s not limited to professional developers – even one project can make you a builder in the CRA’s eyes. Generally, a builder is any person in the business of constructing or substantially renovating homes for sale. This can include individuals who:

• Build or renovate a house with the intention to sell (an “adventure or concern in the nature of trade”).
• Buy a new or unoccupied home from someone else and then resell it.
• Buy into a housing project under construction and finish it for sale.

Importantly, an individual who builds or renovates a home to use as their own primary residence is not considered a builder for GST/HST purposes. For example, if you construct your own home and genuinely live in it as your primary      residence for a substantial period, that’s personal use. But if you built or bought a home “to flip” for profit, even just once, the CRA may deem that you acted as a builder in a business venture. In that case, different tax rules kick in.

Why does this definition matter? If you’re a “builder” under the Excise Tax Act, you’re required to charge and remit GST/HST on the sale of the new or substantially renovated property, or account for tax via a deemed sale (self-supply). You may also lose out on certain rebates and exemptions intended for genuine homeowners. The CRA uses analytics and third-party data to identify potential unreported builder sales.

Why Does the CRA Audit Builders?

The CRA doesn’t choose audit targets randomly – they focus on areas of high non-compliance risk, and real estate is a prime sector. So-called “builder audits” often arise from certain red flags in your tax profile or property transactions. You might be targeted for a GST/HST audit if:

• New Home Sale: You sold a newly built or substantially renovated home, especially shortly after completing the construction or reno.
• Quick Turnaround: You moved into a new or renovated home and then sold it after only a brief occupancy (or never moved in at all).
• Multiple Properties: You’ve repeatedly listed or sold homes in a short time frame (e.g. serial house flipping).
• Real Estate Experience: You or your company have construction or real estate experience, suggesting you know the ropes of property dealing.
• Unreported Flip Profits: The sale wasn’t reported correctly on your income tax return. For instance, declaring the profit as a capital gain or not at all, when it should be full business income.
• Principal Residence Exemption: You claimed the principal residence exemption on the sale to avoid tax on the gain, but the CRA suspects you never intended to live in the property long-term (or you have claimed multiple “principal” residences in short succession).

In short, if you bought, built, or renovated properties and sold them for profit, even just one, the CRA’s algorithms and auditors are on the lookout.

What Does a Builder Audit Involve?

If you’re selected for a builder audit, expect a thorough review of your records and circumstances. The process typically begins with a formal CRA audit notice or letter informing you that your real estate transaction(s) are under review. Here’s what usually happens:

• Information Request: The CRA will request a range of documents. Commonly, they’ll ask for building permits, purchase and sale agreements, construction contracts and invoices, mortgage documents, proof of occupancy (e.g. utility bills, insurance, or driver’s license address), and any agreements related to the property. Essentially, they want to piece together a timeline: when you bought or built the property, how long you lived there (if at all), when you sold, and whether you properly accounted for GST/HST.
• Questionnaire/Interviews: You might receive a questionnaire or be asked for explanations. For example, “What was your intention when you built the home?” or “How long did you live there and what evidence can you provide of occupancy?” The CRA is probing whether this was a genuine residence or an house      flip. Be cautious – your answers can have legal implications.
• Analysis of Intent: A critical issue is your intent at the time of construction or purchase. If the CRA determines your primary or secondary intention was to sell for profit (not to use the home as a long-term residence), they might classify you as a builder for tax purposes. Official CRA guidance states that if you intended to sell the house (even if you or a relative lived in it briefly), the sale is taxable and no new housing rebate is available.
• Audit Outcome – Proposal: After reviewing information, auditors often send a proposal letter outlining preliminary findings. You typically have a chance to respond or provide additional evidence at this stage before a final assessment is issued.

Throughout this process, it’s wise to engage a qualified tax lawyer to manage communications. Remember that anything you tell or submit to the auditor becomes part of the record. It’s crucial to present your case with proper context and legal arguments, rather than handing over documents with no explanation.

GST/HST Consequences for Builders and Flippers

The most immediate impact of a builder audit is usually on the GST/HST side. If the CRA concludes that you were acting as a builder, several costly outcomes may result:

• HST on the Sale: The CRA will assess GST/HST on the sale price of the property if it was new or substantially renovated. This holds true even if you didn’t charge HST to the buyer at the time of sale.
• Deemed Self-Supply: What if you never “sold” the home because you kept it or lived in it? Tax law has a mechanism for that: a deemed self-supply. If you’re a builder and you keep the property (for example, by moving in or renting it out), you are deemed to have sold and repurchased it at fair market value when construction is completed or when a lease begins. HST is calculated on that self-assessed “sale”. In other words, CRA can charge you HST as if you sold the home to yourself, ensuring tax is paid even without an actual sale. This often catches people off-guard – you might move in thinking no HST applies, but later get a bill for HST on a deemed sale value.
• Loss of New Housing Rebate: Normally, individual homebuyers of new homes can claim a GST/HST New Housing Rebate (a partial refund of the HST, available for primary residences under certain price thresholds). However, builders cannot claim this rebate when they construct and sell a home – it’s meant for end-users. If you claimed the rebate (or factored it into the purchase price with your buyer) and CRA decides you didn’t actually qualify as a genuine primary resident, they will claw it back.
• Missed Input Tax Credits (ITCs): To add insult to injury, if you didn’t consider yourself a business at the time, you may not have claimed input tax credits for the GST/HST you paid on construction costs (materials, contractor fees, etc.). Normally, a builder registered for GST/HST could offset the HST collected with ITCs on their costs. But many “accidental builders” don’t register or claim ITCs during the project. By the time      an audit starts, your records may pose challenges to recover those credits.    

All told, a builder audit can leave you on the hook for a substantial tax bill: the unpaid GST/HST, plus interest retroactive to the sale or deemed supply date, and often penalties.

Income Tax Implications of Flipping Properties

In addition to GST/HST issues, the CRA often uses a builder audit to scrutinize your income tax reporting on real estate sales. Key areas they examine include:

• Business Income vs. Capital Gain: When you sell a property, was the profit reported as a capital gain (only 50% taxable) or as business income (100% taxable)? Flippers often hope to treat profits as capital gains or shelter them with the principal residence exemption. However, if your intent was to flip for profit, the CRA’s could take the position that the profit is fully taxable business income. This can dramatically increase your income tax for the year of sale.
• Reopening Past Returns: Normally, the CRA is limited to reassessing a tax return within three years. But in cases of neglect, carelessness, or willful misrepresentation, they can go back further. House flipping audits often invoke this exception. If you’ve done multiple flips over the years, expect CRA to dig into those prior sales as well – even beyond the usual 3-year window (the normal-reassessment period ) . In short, one audit can expand to a multi-year, multi-property examination.
• Penalties and Interest: The financial hit isn’t just the tax itself. CRA can impose substantial penalties. For GST/HST, a gross negligence penalty can be 25% of the tax owing if the CRA takes the position that      you knew (or ought to have known) that the sale was a taxable supply     . For income tax, gross negligence penalties could be 50% of the understated tax. On top of that, interest accumulates daily on any unpaid tax from the date it should have been paid. Over several years, interest can end up rivalling in size the tax itself.

How to Respond if You’re Facing a Builder Audit

Don’t panic – but do take it seriously. If you receive a CRA audit letter about a real estate sale (or any indication you’re being reviewed as a “builder”), prompt and careful action is crucial:

1. Don’t Ignore the Letter: It should go without saying, but never ignore a CRA audit notice. These matters won’t simply go away, and non-response can lead the CRA to assess you arbitrarily. The first contact letter typically gives a deadline to respond or provide documents. Meeting that deadline (or requesting an extension when needed) shows cooperation.
2. Consult a Professional Early: Consider getting a tax lawyer on board before you reply to the CRA. The audit stakes are high – you’re potentially looking at significant liabilities. A professional can communicate with the CRA on your behalf, ensure you don’t inadvertently admit to things out of context, and help protect your rights. Also, communications with a lawyer may be privileged, whereas anything you say to       your accountant could be used as evidence against you.
3. Organize Your Records: Start gathering all relevant documentation that the CRA has requested (and any other records that might support your position). This includes purchase contracts, sales documents, renovation receipts, permits, occupancy proof (e.g. utility bills in your name), insurance records, correspondence about the property, etc. If you did live in the home for a period, compile proof of that (change of address notices, ID, mail, school registration, etc.).
4. Don’t Volunteer Unnecessary Info: Answer the CRA’s questions truthfully, but stick to what is asked. Do not send them your entire life’s financial history if they only asked for details on one property. Over-disclosure can open up a new can of worms. Similarly, avoid speculative or casual statements.
5. Maintain a Professional Tone: It’s easy to get defensive or emotional – after all, your hard-earned money is at stake and the audit letter’s language can feel accusatory. Keep communications factual and polite. If you disagree with the auditor’s stance, you’ll have a chance to formally challenge it (see next section), so there’s no need to argue aggressively during the audit itself. Your goal in the audit stage is to provide complete, accurate information and avoid misunderstandings.

Throughout the audit, you and your representative should aim to clarify why you may not be a builder as defined, or why certain exemptions should apply.

After the Audit: Challenging a Builder Assessment

What if the CRA concludes the audit and issues a hefty reassessment – essentially a bill for taxes and penalties? All is not lost. You have the right to challenge the CRA’s findings through the appeals process.

• Notice of Objection: Filing an objection is the first step if you disagree with a GST/HST or income tax reassessment. You generally have 90 days from the date of the Notice of Assessment or Reassessment to file a formal Notice of Objection. In your objection, you (or better, your tax lawyer) will lay out the reasons you believe the CRA’s assessment is wrong – for instance, disputing the “builder” characterization, the property’s use, the applicability of certain rebates, or the amount of the assessment. This objection is reviewed by the CRA’s Independent Appeals Division, not the original auditors. They may confirm, vary, or vacate the assessment after considering your arguments.
• Appeal to Tax Court: If the outcome at the Objection stage is unsatisfactory (or if CRA delays unduly), you can further appeal to the Tax Court of Canada. This escalates the dispute to a judicial process. Often, the mere act of objecting (and showing you are unafraid to go to court if needed) can lead CRA to revisit the strength of their position. Many disputes settle or resolve without a trial. However, being prepared to take it to court – with strong evidence and legal precedent – is sometimes necessary.
• Payment and Collections: Importantly, for GST/HST assessments, filing an objection does not prevent CRA from attempting to collect the HST amount due (unlike income tax, where collection is usually stayed during a timely objection). You might be required to pay the HST amount or post security to hold off collections.
• Settlements and Relief: Through the objection/appeals process, there may be room to negotiate. For example, even if the tax itself is clearly payable, a gross negligence penalty might be negotiated down or waived if you can demonstrate you were not willfully negligent. Also, interest relief can sometimes be sought through the Taxpayer Relief provisions (if circumstances like a serious illness, financial hardship, CRA delay, etc. contributed to the issue).

The key takeaway is do not accept a CRA reassessment as final if you have grounds to contest it. There are procedural timelines to respect, though, so seek legal counsel quickly once an assessment arrives.

Conclusion: Get Professional Help and Know Your Rights

CRA builder audits are no small matter – they combine complex GST/HST rules with detailed factual analysis of your intentions and actions. The stakes (taxes, penalties, interest, and a potential legal battle) are high, but you don’t have to face it alone. As a tax law firm with experience in CRA audits and tax litigation, we help builders and investors across Canada navigate these audits and fight unfair assessments.

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Statutory Framework for Directors’ Tax Liability

Directors of Canadian corporations face personal liability if their company fails to remit certain taxes. Under Income Tax Act (Canada) (ITA) subsection 227.1(1) and Excise Tax Act (Canada) (ETA) subsection 323(1), directors are jointly and severally liable with the corporation for unremitted employee source withholdings (payroll deductions) and net GST/HST, including interest and penalties. Both statutes provide a due diligence defence in virtually identical terms: a director is not liable if they “exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.” This statutory defence places the onus on directors to show they took proper steps to prevent the company’s failure to remit. The scope of this defence -and the standard of care it entails – was sharply defined by the Federal Court of Appeal in Canada v. Buckingham, 2011 FCA 142 (“Buckingham”).

Buckingham v. Canada (2011 FCA 142): Objective Standard and the Duty to Prevent Non-Remittance

In Buckingham, the Federal Court of Appeal clarified the standard of care for the due diligence defence and underscored that a director’s duty is oriented toward preventing failures to remit, not merely addressing them after the fact. The case involved a director (Mr. Buckingham) whose company fell into serious financial trouble. He undertook extensive efforts to keep the business afloat – seeking new capital, cutting costs, pursuing mergers – but, in the interim, the corporation stopped remitting payroll deductions and GST/HST. The Tax Court had partially absolved Mr. Buckingham (finding his defence succeeded for payroll deductions but not for GST), but on appeal the FCA found him liable for all unremitted amounts.

Objective standard: The FCA held that the standard of care in ITA s.227.1(3) and ETA s.323(3) is strictly objective. This marked a departure from the earlier “objective-subjective” approach in Soper v. Canada (FCA, 1997), which had allowed consideration of a director’s personal knowledge and attributes. The Court explicitly stated that Soper’s mixed standard “has been replaced by the objective standard laid down by the Supreme Court of Canada in Peoples Department Stores”. In other words, the director’s conduct is measured against the actions of a reasonably prudent person in similar circumstances, not against the director’s own background or subjective good intentions.

Preventing the failure vs. curing it: Buckingham also refocused the due diligence inquiry on pre-emptive action. The Court criticized the trial judge for applying a “reasonable business decision” or business judgment approach (drawn from general corporate law in Peoples), instead of the correct statutory test which demands that “the director’s duty of care, diligence and skill be exercised to prevent failures to remit.” The FCA stressed that a director’s foremost duty in this context is to prevent the remittance failure in the first place, rather than simply to remedy it later. Mr. Buckingham’s defence failed because his efforts, however earnest, were directed at rescuing the company and paying creditors after tax defaults had already occurred, instead of ensuring the remittances were made on time. The Court noted that once his company began diverting funds from the tax obligations, his subsequent attempts to catch up were “curative rather than preventive” and thus fell short of the statutory due diligence standard.” Crucially, Buckingham held that the due diligence defence cannot be used to excuse a decision to keep a struggling business operating at the expense of using trust tax monies for cash flow. The judgment made clear that this is precisely the scenario the director-liability provisions are meant to avoid. Quoting the decision, the defence “must not be used to encourage such failures by allowing a care, diligence and skill defence for directors who finance the activities of their corporation with Crown monies, whether or not they expect to make good on these failures to remit at a later date.” In Mr. Buckingham’s case, once he chose to use the proceeds of asset sales to continue operations – knowing that source deductions and GST would not be remitted – he “transferred the risk associated with the asset transaction from [the company] to the Crown,” and at that point his due diligence defence was no longer sustainable. The Court pointedly observed that had the director ceased operations earlier or resigned, thereby avoiding further unremitted tax accruals, he might have been in a better position to avoid personal liability.

No absolute liability: While Buckingham set a high bar, it also affirmed that directors’ liability is not absolute. Parliament provided the due diligence escape hatch, so courts must not interpret the law in a way that makes every failure to remit automatically a director’s personal fault. The FCA rejected any suggestion that because trust taxes (especially GST) are collected from third parties, a director could never be diligent unless remittances were perfect – that would effectively eliminate the defence. Instead, each case must examine whether the director did everything a reasonably prudent person would have done to avoid the company’s default. If so, the defence can still succeed and shield the director, even if the corporation ultimately failed to remit. In short, Buckingham confirmed that a corporation’s tax default does not automatically equal director negligence, but the onus is squarely on directors to prove their vigilant oversight or timely corrective measures to prevent a failure.

Post-Buckingham Appellate Developments: Chriss, Ahmar, and Others

Subsequent Federal Court of Appeal decisions have reinforced and built upon Buckingham’s principles. Notably, in Canada v. Chriss, 2016 FCA 236, the Court applied the objective due diligence test to directors who attempted to avoid liability by resigning (or believing they had resigned). In Chriss, two individuals argued they were not liable for a company’s unremitted payroll taxes because they had effectively resigned years earlier. The FCA disagreed – their resignations were never properly executed or delivered, so they remained directors during the default period. The Court then considered if their belief that they were no longer directors could constitute due diligence. Citing Buckingham, Justice Rennie reiterated that the due diligence defence is assessed on an objective standard – i.e. against the conduct expected of a reasonable person in similar circumstances. A “reasonable director” would not casually assume an oral resignation or unsigned draft was effective; he or she would insist on proper formalities and confirmation. The FCA held that a director’s unilateral subjective belief in having resigned, without taking all steps a prudent person would take to ensure it, does not meet the high threshold for due diligence. In the Court’s words, “a director cannot raise a due diligence defence by relying on their own indifferent or casual attitude to their responsibilities”.

Chriss also addressed a common argument when companies fail: that the directors lost de facto control of the company’s finances to a creditor or third party, leaving them unable to cause the tax payments. The FCA acknowledged that prior cases (e.g. Canada v. McKinnon, 2000 FCA 338; Moriyama v. Canada, 2005 FCA 207) have relieved directors of liability where an outsider (like a secured lender) had legally seized control of the company’s accounts, genuinely preventing the directors from remitting funds. However, the Chriss appellants were not in that situation – although a creditor/investor had influence and had promised further funding, the corporate directors still retained ultimate authority over how available funds were used. The Court drew a clear line: unless a director is effectively stripped of power by external forces, they remain responsible for the decision to pay (or not pay) the Crown. Even facing pressure to pay other bills, a director cannot justify using money owed to the government for other purposes absent a truly involuntary inability to pay.

More recently, in Ahmar v. Canada, 2020 FCA 65, the Federal Court of Appeal reaffirmed the hard line against using government withholding funds as a float for a failing business. Mr. Ahmar was the sole director of a construction company that ran short of cash. He consciously decided to defer HST remittances and instead used incoming revenue (and even his personal funds) to continue operations in hopes of a turnaround. When the CRA assessed him, he invoked due diligence, arguing that keeping the company alive was a reasonable strategy that might ultimately have allowed all creditors (including CRA) to be paid. The FCA flatly rejected this argument. Ahmar underscores that the due diligence defence will fail when a director knowingly uses or withholds tax money to pay other creditors.

Other appellate cases have consistently cited Buckingham as the authoritative framework. For example, in Balthazard v. Canada, 2011 FCA 331, the FCA applied Buckingham to a GST remittance case, overturning a Tax Court judge who had implied that, because GST is collected from customers, a director could hardly ever claim due diligence for failure to remit. The Court of Appeal, pointing to Buckingham, held that this reasoning would effectively make directors insurers of tax debts and impose absolute liability, contrary to Parliament’s intent. Instead, the proper approach was to assess whether the director took all reasonable actions to prevent the failure – including using personal resources, making timely arrangements with tax authorities, etc. – and to only hold them liable if they fell short of that standard. The consistent theme in post-Buckingham jurisprudence is a strict yet principled interpretation: directors will be protected from personal liability only if they can demonstrate concrete, proactive steps directed at preventing tax defaults, and never if they passively allow defaults or willfully choose other priorities over tax compliance.

Conclusion

Ultimately, the Buckingham line of cases delivers a clear message to corporate directors and their advisors: ensuring tax remittances are made is a non-negotiable duty. Good intentions or general efforts to keep the company afloat will not shield a director if they allow the government’s money to be used as working capital. The due diligence defence remains available, but only for the diligent – those who can show concrete, timely and prudent actions aimed at preventing a failure to remit. Especially for directors of financially troubled companies, the prudent course may sometimes be to wind up or step down before tax obligations go unpaid, rather than soldiering on and risking personal liability.