Interest Relief on Income Tax Debts: Canada Versus the United States

Abstract

Subsection 220(3.1) of the Income Tax Act authorizes the minister of national revenue to waive or cancel interest on income tax debts. This power is typically exercised in four circumstances: where interest has accumulated owing to circumstances beyond a taxpayer's control; where the interest has accumulated owing to error or delay by the Canada Revenue Agency; where the accumulated interest causes hardship; or in the context of a voluntary disclosure. South of the border, section 6404 of the Internal Revenue Code authorizes the secretary of the Treasury to "abate" interest on tax debts. As a practical matter, discretionary interest relief under section 6404 is available only in very limited circumstances. The restrictive approach to discretionary interest relief is, however, offset by a greater array of interest-relieving provisions, as well as by the power of the secretary to "compromise" tax liabilities on various grounds, some of which overlap with grounds for interest relief recognized in Canada. This article compares the Canadian and US interest relief regimes, with a view to identifying aspects of the US regime that may merit further consideration in Canada. The differences in the US approach that are of particular interest include • a wider, and arguably more coherent, range of relieving provisions applicable to interest, particularly with regard to interest netting and carrybacks; • the jurisdiction of the United States Tax Court to review refusals to abate interest and/or to accept an offer in compromise; • dealing with situations of hardship and extraordinary circumstances under the aegis of the offer-in-compromise regime, which allows for consideration of the underlying tax liability in addition to the interest, and which also allows for relief to be made conditional on the taxpayer's future compliance with filing and payment obligations; • in certain older cases, a willingness to use interest relief to settle longstanding and complex tax disputes; and • the absence of statutory time limits on the power of the secretary to abate or compromise interest. The comparative study also reveals how Canada and the United States place different weight on policy rationales that underlie interest relief. Canada focuses mainly on ensuring that the consequences of non-compliance for individual taxpayers are fair and equitable. The United States, on the other hand, focuses more on rehabilitating non-compliant taxpayers in the long term, as well as ensuring that interest reflects fair compensation for such taxpayers' use of the public treasury's money—both of which could be given greater attention on this side of the border.