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Tax Court Upholds Penalties Imposed for False Statements

In Morton v. The Queen (2014 TCC 72), the Tax Court of Canada upheld penalties imposed by the Minister of National Revenue (the “Minister”) under subsection 163(2) of the Income Tax Act (Canada) (the “Act””) despite novel arguments by the taxpayer to the contrary.

In this case, the taxpayer originally filed his income tax returns for the relevant years and paid taxes on the reported income.  After the normal reassessment periods expired, utilizing the taxpayer “fairness” provisions in subsection 152(4.2) of the Act, the taxpayer filed T1 Adjustment Requests containing false information in the form of additional income and expenses that would place the taxpayer in a tax loss position in each year. If the Minister had accepted the adjustments, the taxpayer would have received refunds in excess of $202,000.

However, the taxpayer’s plan did not work out as expected. The Minister not only denied the T1 Adjustment Requests, but also levied penalties in excess of $75,000 pursuant to subsection 163(2) of the Act.  These penalties were the subject of the appeal to the Tax Court.

During testimony, the taxpayer admitted to supplying false information in the T1 Adjustment Requests intentionally, knowingly and without reliance on another person. In defense of his actions the taxpayer claimed that he was under stress due to financial difficulties, a marriage breakdown and loss of access to his business books and records. At trial, the Tax Court found as a matter of fact that the misrepresentations were made fraudulently and rejected the taxpayer’s defense since no documentary evidence could be supplied in respect of the alleged stress.

The remainder of Justice Bocock’s decision contained a thorough analysis of the provisions of subsection 152(4.2) of the Act in the context of levying a penalty pursuant to subsection 163(2) of the Act. Justice Bocock provided the following insights:

  • Even where information is supplied to the Minister outside of the context of filing a return for a particular taxation year, if the taxpayer makes fraudulent misrepresentations sufficient to assess under subparagraph 152(4)(a)(i) of the Act, for instance in requesting that the Minister reopen the taxation year under subsection 152(4.2) of the Act, the Minister may assess penalties for a statute barred year.
  • The penalty provisions in subsection 163(2) of the Act apply even in the absence of the Minister issuing a refund or reassessment that relies upon the incorrect information. The Tax Court found it would be absurd to require the Minister to rely on the fraudulent misrepresentations before levying a penalty; and
  • The meaning of the words “return”, “form”, “certificate”, “statement” and “answer” in subsection 163(2) of the Act should be defined broadly to include documents such as the T1 Adjustment Request. Limiting the application of penalties to prescribed returns and forms ignores the plain text, context and purpose of the Act and would lead to illogical results.

It should come as no surprise that the Tax Court upheld the penalties. Nevertheless, the decision provides an enjoyable and thought provoking analysis of the provisions contained in subsections 152(4.2) and 163(2) of the Act.

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Tax Court Upholds Penalties Imposed for False Statements

Canada’s Taxpayer Ombudsman Addresses Fear of Reprisal

In the August 2013 edition of Perspectives, Taxpayer Ombudsman J. Paul Dubé highlighted the recent addition of Article 16 to the Taxpayers’ Bill of Rights protecting taxpayers against any possibility of reprisals by the CRA.

Previously, in June 2013, Gail Shea, then-Minister of National Revenue, and Mr. Dubé announced the addition of Article 16 to the Taxpayers’ Bill of Rights:

16. You have the right to lodge a service complaint and request a formal review without fear of reprisal.

In the newsletter, Mr. Dube states,

This right means that if you lodge a service complaint and request a formal review of a CRA decision, you can be confident that the CRA will treat you impartially, and that you will receive the benefits, credits, and refunds to which you are entitled, and pay no more and no less than what is required by law. You should not fear reprisal.

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Canada’s Taxpayer Ombudsman Addresses Fear of Reprisal

Successful judicial review of taxpayer relief application: NRT Technology Corp v. AG Canada

The taxpayer in this case, NRT Technology Corp, successfully applied before the Federal Court for judicial review in respect of a decision of an Assistant Director of the Toronto Tax Services Office of the Canada Revenue Agency denying NRT’s request for the cancellation of a penalty under the Taxpayer Relief Provisions pursuant to subsection 220(3.1) of the Income Tax Act (Canada). The style of cause is NRT Technology Corp v. Attorney General of Canada, 2013 FC 200.

Background

On February 26, 2006, NRT paid a bonus to its President in the amount of $7,093,000 (the “Bonus”). On March 14, 2006, NRT remitted corresponding withholding payroll taxes in the amount of $2,848,548.80. On March 23, 2006, CRA assessed NRT for a 10% late remitting penalty in the amount of $284,805 as NRT had accelerated remitter status which it was notified of by the CRA in November 2005. CRA determined that NRT ought to have remitted the $2,848,548.80 on March 3, 2006 and its failure to do so warranted the assessment of a penalty.

Upon payment of the Bonus, NRT was advised by its tax advisor to hold off on the payroll remittances to the CRA until further instruction was received by her. On March 13, 2006, NRT’s tax advisor indicated that she had been advised by the CRA that NRT was obliged to withhold and remit the full amount of tax due on the payment of the Bonus by March 15, 2006. On March 14, 2006, NRT remitted the payroll taxes on account of the payment of the Bonus.

The First Taxpayer Relief Request

On November 9, 2006, in response of a relief request dated September 13, 2006 by NRT, the CRA denied the request stating that a “review of the account history and the circumstances outlined in [NRT’s] letter [had] failed to substantiate that [NRT was] prevented from complying with the [CRA’s] requirements.” The CRA further indicated that NRT failed to demonstrate that the lateness was the result of extenuating circumstances or the result of CRA departmental error and that as a result, the directors of NRT did not exercise reasonable care with respect to the remittance.

The Second Taxpayer Relief Request

On July 18, 2007, NRT filed for a second administrative review in relation to the taxpayer relief request. In a letter dated December 14, 2007, the Director denied the requested relief.

Under the second level review process, an officer reviews the applicant’s second level review submissions and prepares a recommendation report for the review of the Director. The Director then decides whether to grant the relief sought. In this case, the officer’s report and ultimate decision made by the Director and communicated to NRT by letter dated December 14, 2007 were at issue (the “Decision Letter”).

The officer’s report recommended that relief should not be granted on the basis that NRT exhibited a degree of carelessness in its handling of the Bonus and failed to act quickly to remedy the error. In accepting the recommendation in the officer’s report, the Decision Letter indicated that there was no evidence that NRT was misdirected by the CRA or that the CRA failed to provide information to NRT in a timely manner. It was further stated that NRT was careless in its handling of the bonus and was not quick to remedy the error.

The focus of the Federal Court’s analysis was on the reasonableness of the impugned second level decision.

The Applicant’s Argument

It was NRT’s contention that given the broad authority available to the Minister to grant relief under s. 220(3.1) and the extraordinary circumstances, the Minister’s decision to deny relief was unreasonable. Further, no reasons were given as to how NRT failed to quickly act to remedy the error that had been committed. NRT noted that once its tax advisor had advised it to remit, it did so without delay.

The Respondent’s Argument

In noting that deference was owed to the CRA under the reasonableness standard of review, the Crown reiterated its reasons as outlined in the Decision Letter in support of its position.

The Decision of the Federal Court

The Federal Court noted that it was not clear what exactly the “error” was which was not acted upon quickly enough. If the “error” was failing to remit on or before March 3, 2006, this error was rectified with NRT’s remittance on March 14, 2006, a day after it was advised by its tax advisor that such remittance was required immediately, contrary to NRT’s belief that the remittance was required by March 15, 2006.

If the “error” was not paying the penalty in a timely manner, the Federal Court noted that the offsetting amount pursuant to the flow-through shares acquired by NRT was not accounted for until August 2006. As such, there was no way for NRT to know how much was owed until that time. Moreover, the reduced amount owing was offset against GST refunds in November 2006. If this was in fact the “error” referenced in the Decision Letter, NRT had taken steps to reduce the amount and ultimately settle the balance in a timely manner.

As there was no indication in the Decision letter as to what the “error” was, why NRT’s rectification was not sufficiently prompt, or how NRT could have rectified the situation more quickly, the Federal Court concluded that the reasoning in the Decision Letter was equivocal. The steps taken by NRT were supportive of its claim that it quickly remedied its failure to remit the amount due and that it took steps to address the penalty owed. The Court therefore found in favor of NRT, concluding that the “…Director’s decision that NRT failed to quickly remedy the error to be unreasonable as it fails the requirements of being justified, transparent and intelligible as required under Dunsmuir.”

Reflections

The impact of this decision goes beyond merely chastising the CRA for a poorly written letter. There appears to be a “cut and paste” approach applied by the CRA from time to time which may cause a reasonable observer to believe that the taxpayer’s circumstances were not fully considered, particularly where the taxpayer’s conduct reflects a considerable degree of due diligence.  It is hoped that this decision will cause those at the CRA who are responsible for reviewing taxpayer relief requests to thoroughly consider the circumstances of each case, particularly where quick action was taken in the direction of compliance - taxpayers deserve no less.

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Successful judicial review of taxpayer relief application: NRT Technology Corp v. AG Canada

Federal Court Calls CRA’s Reasons “Inadequate” on Denial of Fairness Request

On October 21, 2011, the Federal Court (Justice Sandra Simpson) released her decision on an application for judicial review in Dolores Sherry v. The Minister of National Revenue. The applicant requested judicial review pursuant to section 18.1 of the Federal Courts Act of a decision of the Canada Revenue Agency (“CRA”) in which the CRA refused to cancel or waive interest and penalties related to the applicant’s taxes for 1989 to 2000. The decision is important because the Federal Court held that the reasons provided to the applicant by the CRA were inadequate.

The applicant had sought judicial review of the refusal by the CRA and on October 25, 2005, the Minister commenced a review of the applicant’s file in accordance with the terms of an order by Justice Heneghan on April 25, 2005. Justice Heneghan made an order on consent referring the matter to the Minister for redetermination. Upon completing its redetermination, the CRA told the applicant that it declined to reduce the interest charged to the applicant from 1989 to 2000 for the following reasons:

In reviewing your financial circumstances, we conducted a cash flow analysis to determine your ability to meet your tax obligations from 1989 to 2000. In conducting this analysis we have applied the direction in the Court Order and excluded the $100,000 you reported as taxable capital gain in our cash flow analysis and included your rental loses for years 1989 to 1994 as cash outflow. Our cash flow analysis shows that your net cash flow (funds received less expenses paid during the applicable years) was sufficient to meet your tax obligations from 1989 to 2000, except for the negative cash flow years 1991, 1992, and 1993. However, we considered the fact that you had significant equity in properties that you owned during the years 1991 to 2000 and could use this equity to meet your tax obligations and to cover the negative cash flows. Therefore, your request for interest relief under financial hardship is denied.

Justice Simpson held that those reasons were inadequate as CRA “extrapolated” from her income and expenses in 2001 a cash flow summary for the years 1989 to 2000 and CRA relied, in part, on its own appraised value of the applicant’s properties when it considered whether she had equity in her real estate holdings.

Justice Simpson concluded that although the CRA’s decision, as originally communicated to the applicant, did not offer adequate reasons, a more detailed “Fairness Report” prepared by the CRA did provide an adequate explanation. Although, by the time of the hearing, the applicant had a copy of the “Fairness Report”, she was not given a copy when the CRA first told her about its decision. Therefore, the application for judicial review was allowed.

As the applicant was required to initiate a judicial review application before she received the “Fairness Report”, the Court granted her costs for the preparation of the application. Once the “Fairness Report” was secured by the applicant, the only issue on which the applicant was successful was resolved and therefore, no relief beyond the cost award was granted.

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Federal Court Calls CRA’s Reasons “Inadequate” on Denial of Fairness Request