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Overview
Interest assessments arising from Canada Border Services Agency (CBSA) compliance verifications can place significant financial strain on Canadian importers, particularly when GST coding or exemption errors result in reassessments involving large amounts.
The Federal Court's decision in T-1011-25 Lufthansa Technik Aktiengesellschaft v. AGC offers important guidance on how interest-relief applications must be evaluated under s. 3.3 of the Customs Act and demonstrates how judicial review can be used when CBSA fails to exercise its statutory discretion lawfully.
This decision provides important lessons for businesses and taxpayers who face interest charges even where the government suffers no revenue loss—an issue that experienced Canadian tax lawyers frequently address when advising clients.
Facts of the Lufthansa Technik CaseLufthansa
Technik, a global aircraft maintenance and repair entity, imported parts into Canada for installation and overhaul work. In 2024, the CBSA undertook a trade compliance verification. The verification concluded that Lufthansa had used incorrect GST exemption codes, creating a substantial unpaid GST liability. CBSA issued an interim verification report in December 2024 and later confirmed its position in a final report on March 6, 2025.
Under s. 33 and the "specified rate" identified in s. 2(1) of the Customs Act, CBSA imposed interest of approximately $3.7 million. Lufthansa did not challenge the GST reassessment itself but sought relief from interest based on the following grounds:
- The GST payable was fully recoverable through an input tax credit (ITC), so the government could not suffer any revenue loss.
- CBSA's internal "wash transactions policy" required interest relief where no revenue loss exists.
- Imposing the specified interest rate was unreasonable and unsupported by any explanation.
- Different treatment of import GST compared with domestic GST contradicted Canada's international obligations under the GATT.
Despite these submissions, CBSA denied relief. It claimed Lufthansa had not satisfied the wash-transaction criteria, that relevant CRA policies did not apply to import GST, and that using the specified rate was appropriate—though it did not explain why.
The Federal Court found these findings insufficient and unreasonable.
Legal Issues Considered by the Court
Application of the Wash-Transaction Policy
CBSA Memorandum D11-6-4 sets out a detailed wash-transaction policy designed to avoid interest assessments when errors create no net revenue loss. Lufthansa's full ITC entitlement meant revenue loss was impossible. CBSA, however, failed to analyze this core criterion. The Court held that CBSA must meaningfully assess whether revenue loss exists before denying interest relief.
Administrative-Law Requirements and Procedural Fairness
Administrative decisions must reflect transparent, intelligible, and justified reasoning. The CBSA's refusal to address Lufthansa's central argument—the complete absence of revenue loss—violated these principles. The Court found that the decision lacked the justification demanded under modern administrative-law principles.
Failure to Justify the Interest Rate
The CBSA's imposition of the "specified rate" instead of the default "prescribed rate" required explanation. None was provided. As a result, the Court concluded that the decision could not stand.
Judicial Review: The Legal Framework and Its Role Here
Judicial review allows taxpayers to challenge the lawfulness and reasonableness of decisions made by administrative bodies such as CBSA. Importantly, judicial review does not reconsider the underlying tax liability; instead, it examines whether the decision-maker applied the correct policy framework, acted fairly, and provided adequate reasoning.
In this case:
- Lufthansa accepted the GST reassessment but challenged CBSA's discretionary refusal to grant interest relief.
- The Federal Court applied the Vavilov standard, which requires decisions to be justified, transparent, and intelligible.
- Because CBSA's reasons did not address the key submissions, the decision was unreasonable.
- The Court set aside the decision and returned the matter to CBSA for redetermination using the correct analytical framework.
Judicial review thus became the appropriate vehicle for correcting a flawed administrative decision—a tool that a knowledgeable Canadian tax lawyer regularly uses when CBSA's discretionary decision-making is inconsistent or unsupported.
Implications for Canadian Businesses and Importers
The decision carries several important lessons:
- CBSA must conduct a genuine wash-transaction analysis when taxpayers demonstrate that no revenue loss is possible.
- Importers are entitled to administrative decisions that address their evidence and provide adequate reasons.
- Failure by CBSA to consider applicable internal policies can render a decision unreasonable.
- Judicial review is an effective safeguard for importers facing interest obligations that arise solely from technical mistakes rather than substantive tax non-compliance.
- For industries such as aerospace, manufacturing, energy, and technology—where substantial imports are routine—the decision reinforces the value of obtaining advice from a seasoned Canadian tax lawyer when preparing interest-relief submissions.
Pro Tax Tips
- Maintain detailed GST coding documentation and ITC records to support claims of no revenue loss.
- When seeking interest relief, directly address each factor in the wash-transaction policy and provide objective evidence.
- If CBSA's decision does not respond to your core arguments, consult a Canadian tax lawyer immediately, as judicial review deadlines under the Federal Courts Act are strict.
- Consider conducting internal compliance reviews before a CBSA verification begins to reduce exposure.
Frequently Asked Questions
What is the CBSA wash-transaction policy?
It is the policy allowing interest relief when errors do not result in revenue loss.
Does judicial review re-evaluate the tax owing?
No. Judicial review examines whether the decision-maker acted reasonably and lawfully.
Can CBSA waive interest even when GST is technically payable?
Yes. CBSA must consider waiving interest when no revenue loss is possible.
Is judicial review worthwhile?
It is often essential when CBSA ignores key evidence or applies policy incorrectly. A knowledgeable Canadian tax lawyer can identify when judicial review is appropriate.
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.
