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Gordon: CRA May Not Fetter Discretion on Interest Relief Application

In Gordon v Canada (Attorney General) (2016 FC 643), the Federal Court granted the taxpayer’s application for judicial review and reminded the CRA that it may not fetter its discretion when considering applications for interest relief.

The taxpayer, an individual, bought and imported vehicles using the dealer license of Coastal Collision, a local auto dealership. Both parties consulted their respective accountants, who advised the parties that Coastal Collision should collect and remit GST/HST on the auto sales.

Accordingly, in reporting periods from January 1, 2008 to June 30, 2010, Coastal Collision collected and remitted the GST/HST on all the vehicles sold in its arrangement with the taxpayer.

The CRA reassessed the taxpayer and Coastal Collision on the basis that the taxpayer was required to collect and remit GST/HST on the auto sales. The CRA reduced the GST/HST owed by Coastal Collision, and increased the taxpayer’s GST/HST owing to $46,650.84.

On October 27, 2011, the CRA refunded Coastal Collision’s overpayment, at which time the taxpayer paid a portion of his GST/HST owing, and paid the remaining amount on October 31, 2011.

The CRA assessed interest on the GST/HST assessed against the taxpayer.

The taxpayer made an application for interest relief in which he asked for cancellation of all interest accrued since 2008 except for the modest interest accrued from October 27 to 31, 2011, the period after the CRA refunded Coastal Collision and before the taxpayer had paid the full amount owing.

Under subsection 281.1(1) of the Excise Tax Act (see also subsection 220(3.1) of the Income Tax Act), the CRA may waive or cancel interest and penalties that have been assessed against a taxpayer. The CRA has published guidelines that describe the circumstances in which the CRA may grant relief (i.e., natural disasters, illness, emotional/mental distress, CRA delay, inability to pay/financial hardship, etc.) and certain factors to be considered on each application (i.e., taxpayer’s history of compliance, existence of unpaid balance, actions taken to remedy the omission, existence of reasonable care/diligence by taxpayer, etc.) (see the CRA’s guidelines here and here).

In Gordon, the CRA had denied the taxpayer’s request for interest relief on the basis that a “wash transaction” existed in this case (i.e., the GST/HST was collected and remitted by the wrong entity within a closely related group of commercial entities or associated persons), and the provisions of GST/HST Memorandum 16.3.1 “Reduction of Penalty and Interest in Wash Transaction Situations” allowed the waiver/cancellation of only that interest in excess of 4 percent.

On the application for judicial review in the Federal Court, the taxpayer argued that it was unfair to charge interest on payments that were at all times in the possession of the CRA, and the CRA had erred in refusing to grant relief. The Crown argued that the CRA had made no reviewable error in the decision, and moreover the decision was reasonable.

The Federal Court noted that fettering of discretion is always outside the range of acceptable outcomes and if therefore per se unreasonable (Stemijon Investments Ltd. v. Canada (Attorney General), 2011 FCA 299; JP Morgan Asset Management (Canada) Inc. v. M.N.R., 2013 FCA 250). A decision-maker may consider administrative guidelines, but a decision-maker will fetter his/her discretion if they consider the guidelines as binding (Waycobah First Nation v Canada (Attorney General) 2011 FCA 191).

In this case, the Federal Court noted the CRA had treated Memorandum 16.3.1 as binding, and as such the Minister had fettered her discretion. The CRA had failed to give any consideration to the taxpayer’s individual circumstances, including his history of compliance, the fact that GST/HST had been remitted promptly, and the error was not the result of any negligence on the taxpayer’s part (in fact, he had relied on professional advice).

The Federal Court granted the taxpayer’s application for judicial review, set aside the CRA’s decision, and returned the matter to the CRA for redetermination in accordance with the Court’s reasons.

The Gordon case is another reminder from the courts that the CRA’s administrative guidelines, while providing “consistency, transparency and fairness in the decision-making process”, are advisory only and the CRA may not rely on such guidelines in a manner that limits the discretion conferred under the statute.

Taxpayers who encounter such a response from the CRA on an application for interest relief may wish to remind the CRA of this important principle, as it has been the subject of several cases in recent years, and the courts have been clear about the role of such guidelines in the decision-making process.

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Gordon: CRA May Not Fetter Discretion on Interest Relief Application

FC Dismisses JR Application for Delay

A party may bring an application pursuant to section 18.1 of the Federal Courts Act for review of a discretionary decision of a government board, commission or other tribunal.  Generally, the application must be made within 30 days of the decision.

In R & S Industries (2016 FC 275), the Federal Court dismissed a taxpayer’s application for judicial review of a discretionary decision of the CRA because the Court held that the taxpayer had missed the 30-day deadline and no extension of time should be granted.

In R & S, the taxpayer made some errors in a T2059 form in connection with a subsection 97(2) rollover of property to a partnership. The CRA reassessed, and the taxpayer objected.

The CRA Appeals Officer told the taxpayer that an amended T2059 must be filed in order to properly deal with the reassessment.  Accordingly, the taxpayer filed an amended T2059 pursuant to subsection 96(5.1) of the Income Tax Act, which allows a subsection 97(2) rollover election to be amended where “in the opinion of the Minister, the circumstances of a case are such that it would be just and equitable” to permit the taxpayer to amend an election.

A CRA officer (other than the Appeals Officer) denied the application under subsection 96(5.1) and various letters were sent to the taxpayer to that effect.  The Appeals Officer then confirmed the reassessment on the basis that the taxpayer’s request under subsection 96(5.1) had been denied.

When the taxpayer appealed the reassessment to the Tax Court, the Crown alleged that the Tax Court had no jurisdiction to review the CRA’s decision to reject the taxpayer’s application under subsection 96(5.1) to amend the T2059 because it was a discretionary decision of the Minister of National Revenue and not subject to an appeal to the Tax Court.

The taxpayer then commenced a judicial review application in the Federal Court on the basis that the decision under subsection 96(5.1) was both procedurally unfair and unreasonable. The Crown rejected both arguments and further argued that the application was out of time and no extension should be granted.

In dismiss the taxpayer’s application, the Federal Court stated that it was clear that the taxpayer had missed the 30-day deadline because there had been a lengthy delay from the date of the decision (January 31, 2014) to the filing of the application for judicial review (May 19, 2015).

The Federal Court refused to consider the subsequent correspondence between the taxpayer and the CRA as having created a later date on which the decision was communicated.

The Court did not accept the taxpayer’s argument that the character of the decision as an exercise of Ministerial discretion was not conveyed to the taxpayer until sometime after January 2014. Further, the Federal Court noted that the taxpayer had counsel throughout the process, and counsel was knowledgeable about the CRA’s decision-making process. The Court held that the CRA had no obligation to inform the taxpayer of the availability of judicial review of the discretionary decision.

In respect of an extension of time to file the application, the Federal Court held that the taxpayer had failed to establish that (i) it had a continuing intention to pursue the judicial review application, (ii) no prejudice arose to the Minister of National Revenue, (iii) there was a reasonable explanation to the delay, and (iv) there was merit to the application (see Exeter v. Canada, 2011 FCA 253).

Despite having found that the taxpayer was out of time to pursue a judicial review application, the Federal Court considered the taxpayer’s arguments in respect of the merit of the application, and held that the CRA’s decision was neither unfair nor unreasonable.

The appeal in the Tax Court continues. It is still an open question whether or not the Tax Court has jurisdiction to consider the taxpayer’s arguments regarding subsection 96(5.1) in the context of an appeal of the reassessment.

This case is an important reminder to tax professionals that if the CRA communicates a discretionary decision to a taxpayer, the appropriate relief is sometimes in Federal Court rather than Tax Court. Identifying and quickly responding to those discretionary decisions is key to preserving the client’s right to pursue a remedy.

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FC Dismisses JR Application for Delay

McNally: CRA Does Not Have Unfettered Discretion to Delay Assessment

In McNally v. Canada (National Revenue) (2015 FC 767), the taxpayer brought an application to the Federal Court for an order requiring the Minister to assess his tax return. The Federal Court allowed the taxpayer’s application and ordered the Minister to examine the taxpayer’s tax return and issue a Notice of Assessment within 30 days.

Background

The taxpayer invested funds in a gifting tax shelter in respect of which he claimed a number of deductions.

The taxpayer filed his 2012 federal income tax return in April 2013. Two months later – in June 2013 – he received a letter stating that his return had not been assessed because the CRA was undertaking an audit of the gifting tax shelter program. In July 2013, the taxpayer filed an application for judicial review of the CRA’s decision not to assess his return. Two years later, the taxpayer’s 2012 return still had not been assessed.

Arguments

Under subsection 152(1) of the Income Tax Act, the CRA shall examine a taxpayer’s return of income and assess the tax for that taxation year “with all due dispatch.”

The taxpayer argued that the CRA was deliberately delaying the assessment for the improper purpose of discouraging participation in gifting tax shelters. The court noted that, in the CRA’s view, widely-marketed tax shelters are generally invalid. In this case, the CRA admitted that it chose not to assess the tax returns of participants in the gifting tax shelters in order to discourage participation in such investments, to undertake an audit the tax shelter, and to educate the public about gifting tax shelters.

The CRA admitted that the main reason the taxpayer’s return was not reassessed was to discourage participation in gifting tax shelters. The CRA submitted that this motive did not conflict with its duty under subsection 152(1) of the Act.

Analysis

In allowing the application, Justice Harrington of the Federal Court followed the decision in Ficek v Canada (Attorney General) (2013 FC 502) in which the Court held that the Minister had failed to assess the taxpayer’s return “with all due dispatch.”

In Ficek, a delay in examining the taxpayer’s return arose from a new policy of discouraging certain types of tax shelter investments. In Ficek, the court acknowledged that the CRA has discretion in assessing taxpayers but noted “…the discretion is not unfettered, it must be reasonable and for a proper purpose of ascertaining and fixing the liability of the taxpayer” (para. 21). Importantly, the Court held that there should be some certainty to the taxpayer’s financial affairs (para. 34).

In McNally, Justice Harrington followed this reasoning. He held that the phrase “with all due dispatch” does not imply a specific time period before which the Minister must make an assessment. However, he found that while the Minister has discretion, it is not unfettered. The determination of whether the Minister has examined a taxpayer’s return “with all due dispatch” is a question of fact.

The Federal Court ultimately determined that the Minister had failed to assess the taxpayer’s tax return “with all due dispatch.”  The court held:

[41] … Although the Minister is responsible for administrating the Income Tax Act, ultimately it falls upon the courts to decide whether a claimed deduction is valid or not. It is plain and obvious that Mr. McNally’s rights have been trampled upon for extraneous purposes.

[42] The Minister owes Mr. McNally a statutory duty to examine his return “with all due dispatch.” There may well be circumstances in which it will take some time to reach a conclusion with respect to a given return. It may well be appropriate to await the audit of third parties. However this is not one of those cases.

[43] The CRA is entitled to express concerns with respect to certain shelters and to warn that such shelters will be audited. In Mr. McNally’s case, however, the resulting delay is capricious and cannot be allowed to stand. Even assuming these secondary purposes to be valid, they are overwhelmed by the primary main purpose and cannot save the day.

Interestingly, McNally goes a step further than the Court in Ficek, in which the Court had simply declared that the CRA had failed to assess with all due dispatch. McNally is a good example of the Federal Court exercising its judicial review authority to compel the CRA to carry out its statutory duty. This does not assure the taxpayer that he is entitled to his charitable donation claims, but at least he will be able to commence a challenge of the disallowance of the claims.

While the McNally decision does not go so far as to tell us what “with all due dispatch” means, the decision is the second important reminder that the CRA’s discretion in assessing taxpayers, while broad, is not unfettered.

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McNally: CRA Does Not Have Unfettered Discretion to Delay Assessment

ConocoPhillips: FCA Confirms Tax Court’s Jurisdiction to Determine Questions of Timing and the Validity of a Notice of Objection

In ConocoPhillips Canada Resources Corp. v. The Queen (2014 FCA 297), the Federal Court of Appeal overturned a Federal Court decision (2013 FC 1192) and dismissed an application for judicial review by the taxpayer finding that the Federal Court lacked jurisdiction in this case.

ConocoPhillips had commenced an application for judicial review as a result of a dispute between the CRA about whether a Notice of Reassessment had been validly sent to the taxpayer.  The CRA alleged that it mailed a Notice of Reassessment on November 7, 2008. ConocoPhillips alleged that it never received the Notice of Reassessment and that it first learned of the reassessment on April 14, 2010.

Accordingly, when ConocoPhillips filed a Notice of Objection on June 7, 2010, the CRA advised that it would not consider the objection on the grounds that it was not filed within 90 days of the alleged mailing date (i.e., November 7, 2008) and that no request for an extension of time was made within the year following the alleged mailing date of the reassessment.

The Federal Court considered the question of jurisdiction and found that it had jurisdiction because the Court was not being asked to consider the validity of the reassessment (which can only be determined by the Tax Court of Canada) but rather, was only being asked to review the CRA’s decision not to consider the objection.

Based on the standard of reasonableness, the Federal Court found in favour of ConocoPhillips on the basis that the CRA had not sufficiently engaged the evidence to appropriately render an opinion whether or not the reassessment was mailed on the alleged date. The Court set aside that decision.

The Crown appealed to the Federal Court of Appeal on the basis that the Federal Court lacked jurisdiction on this issue.  The Federal Court of Appeal allowed the appeal.

Section 18.5 of the Federal Courts Act provides that judicial review in the Federal Court is not available where, inter alia, an appeal is permitted on the issue before the Tax Court of Canada.  In the present case, the Federal Court of Appeal stated that, pursuant to subsection 169(1)(b) of the Income Tax Act (Canada), ConocoPhillips could have appealed to the Tax Court after 90 days had elapsed following the date its objection was initially filed and the Tax Court would have been the correct forum to determine if, or when, the Notice of Reassessment was mailed and when the time for filing a Notice of Objection expired.

The Federal Court of Appeal clarified that the Minister’s obligation to consider a Notice of Objection is triggered regardless of whether a Notice of Objection may have been filed within the required time-frame. Further, the Minister’s decision on this issue is not an impediment to filing an appeal to the Tax Court pursuant to paragraph 169(1)(b) of the Income Tax Act (Canada). Accordingly, judicial review of this issue was not available in the Federal Court.

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ConocoPhillips: FCA Confirms Tax Court’s Jurisdiction to Determine Questions of Timing and the Validity of a Notice of Objection

Take a Chance: Judicial Review of the CRA’s Discretionary Power under s. 152(4.2) of the Income Tax Act

In Radonjic v. The Queen (2013 FC 916), the taxpayer brought an application for judicial review of the CRA’s refusal to make certain adjustments to the taxpayer’s tax returns after the normal reassessment period had expired.

In 2003, the taxpayer start playing online poker. After consulting with his accountant, the taxpayer treated his gambling winnings as income in 2004, 2005, 2006 and 2007. Later, he concluded that his gambling winnings were likely not taxable. Accordingly, the taxpayer filed a request for an adjustment under subsection 152(4.2) of the Income Tax Act asking that the income tax he had paid be returned to him.

The CRA denied the taxpayer’s adjustment request. The taxpayer then brought an application for judicial review of the decision to deny the adjustment request.

The Federal Court noted that the standard of review for the CRA’s exercise of discretion under subsection 152(4.2) is reasonableness (see Dunsmuir v. New Brunswick (2008 SCC 9), Caine v. C.R.A. (2011 FC 11), and Hoffman v. Canada (2010 FCA 310)). In other words, the court should intervene only if the decision was unreasonable in the sense that it falls outside the “range of possible, acceptable outcomes which are defensible in respect of the facts and law”.

The Federal Court considered the parties’ positions on the issue and the various court decisions that have addressed the taxation of gambling gains and losses (see, for example, Cohen v. The Queen (2011 TCC 262), and Leblanc v. The Queen (2006 TCC 680)).

The court concluded that the CRA had fully considered all of the taxpayer’s submissions, and that there was no evidence of procedural unfairness or bad faith by the CRA.

However, the court concluded that the CRA had misinterpreted or misunderstood the taxpayer’s activities, and had drawn unreasonable and unsupportable conclusions about the tax treatment of the taxpayer’s gambling winnings:

[51] … The Minister’s exercise of her discretion under subsection 152(4.2) of the Act in this case lacks intelligibility and justification and, in my view, falls outside the range of possible, acceptable outcomes which are defensible in respect of the facts and law.

Overall, the court found that the taxpayer was simply an enthusiastic and ever-hopeful poker player engaged in a personal endeavour.

The court quashed the CRA’s decision and returned the matter to the CRA for reconsideration in accordance with the court’s reasons.

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Take a Chance: Judicial Review of the CRA’s Discretionary Power under s. 152(4.2) of the Income Tax Act

Judicial review applications challenging Minister’s alleged violation of Voluntary Disclosure Policy and MAP agreement allowed to proceed: Sifto Canada Corp. v. MNR

In Sifto Canada Corp. v. Minister of National Revenue, 2013 FC 214, Prothonotary Aalto of the Federal Court rejected the Crown’s motion to strike out judicial review applications filed by Sifto Canada Corp. challenging decisions made by the Minister of National Revenue to:

(a) assess penalties contrary to the terms of the Voluntary Disclosure Program; and

(b) assess transfer pricing adjustments contrary to an agreement between the Competent Authorities of Canada and the United States on the appropriate transfer price under Article XXVI of the Canada-U.S. Tax Treaty (known as the “Mutual Agreement Procedure” or “MAP”).

The Crown made the usual argument that section 18.5 of the Federal Courts Act precludes such judicial review applications (for background, see our earlier post on the JP Morgan decision mentioned below).  Prothonotary Aalto had this to say about the Crown’s argument:

[8]    One of the mantras of the Minister of National Revenue is that the judicial review process should not be used to circumvent the comprehensive code for the assessment and collection of taxes set out in the Income Tax Act (ITA) and for which the Tax Court of Canada (TCC) is given exclusive jurisdiction.  As a general proposition, this is a correct approach to the taxation regime in Canada.  However, cases such as Chrysler Canada [2008 FC 727, aff’d 2008 FC 1049], JP Morgan Asset Management [2012 FC 651, aff’d 2012 FC 1366] and Canadian Pacific Railway [2012 FC 1030; aff’d 2013 FC 161] come to this Court and fall within this Court’s jurisdiction because of their unique factual circumstances.  This case, like those, revolves around a factual scenario which takes it out the pure assessment or appeal regime of the ITA and the jurisprudence recognizes that such matters can come within the jurisdiction of this Court.

Prothonotary Aalto explained his reasoning for allowing the applications to proceed:

[22]    In this case there are agreements which are alleged to have been entered into between Sifto and the Respondent which are alleged to have been breached.  These facts on their face do not engage issues of the correctness of assessments or appeals under the ITA.  They are therefore not bereft of any chance of success.  To the extent the breach of agreements and other allegations made in these applications engage matters beyond the scope of the correctness of an assessment or re-assessment they are not within the jurisdiction of the TCC.

[23]    The conduct of officials in CRA cannot be considered in determining the correctness of assessments [footnote omitted].  Such matters must be asserted in another Court.  Thus, the conduct of CRA officials as asserted by Sifto in this case relating to understandings and agreements cannot be considered by the TCC.

[24]    These applications engage more than a review of assessments to determine their correctness.  Therefore, it cannot be said that these applications are bereft of any chance of success.

In addition to arguing that the applications should be struck out in their entirety, the Crown argued in the alternative that certain allegations should be struck out or that the applications be stayed (by way of “extension of time”) until the final determination of appeals against the assessments issued as a result of the impugned decisions.  Prothonotary Aalto had little difficulty dismissing each of the Crown’s alternative arguments.

The Crown has already made a motion asking a Federal Court judge to set aside the Prothonotary’s decision.  In light of the decisions of the Federal Court in Chrysler Canada, JP Morgan and Canadian Pacific, the Crown may very well be facing an uphill battle.

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Judicial review applications challenging Minister’s alleged violation of Voluntary Disclosure Policy and MAP agreement allowed to proceed: Sifto Canada Corp. v. MNR

Foreign-based Requirement Under Section 231.6 of the Income Tax Act Upheld by the Federal Court

The Canada Revenue Agency had an important win this week in its efforts to access information outside of Canada.  On March 20, 2013, the Federal Court issued its decision in Soft-Moc Inc. v. M.N.R.  2013 FC 291, dismissing Soft-Moc’s judicial review application to have the CRA’s decision to issue a Foreign-Based Information Requirement set aside or varied.

The CRA has broad powers to access information related to the determination of a taxpayer’s tax obligations.  Under subsection 231.6 of the Income Tax Act, these powers include the issuance of a Foreign-Based Information Requirement to obtain information or documents located outside of Canada.

In Soft-Moc, the CRA was conducting a transfer pricing audit and sought information from corporations in the Bahamas who provided services to Soft-Moc.  These corporations and their individual Bahamian resident shareholder owned 90% of the common shares of Soft-Moc.  The CRA issued a Foreign-Based Information Requirement to Soft-Moc under subsection 231.6(2) of the Income Tax Act.

The Requirement requested substantial amounts of information related to the Bahamas Corporations including extensive details of the services provided, customers, financial statements, costs and profits and employee data.  Soft-Moc applied for judicial review of the decision to issue the requirement.

Primarily, Soft-Moc argued that the information requested went well beyond that necessary to enable the CRA to complete the transfer pricing audit and that the decision to issue the requirement was, therefore, unreasonable.  Soft-Moc argued that a portion of the information requested was irrelevant and that some portions were confidential or proprietary.

The Court was not sympathetic to Soft-Moc’s arguments, noting the wide-ranging statutory powers of the CRA to collect information and the low threshold to be met in determining whether the requested information is relevant and reasonable.

This win, which was not surprising in light of the Federal Court of Appeal’s earlier decision in Saipem Luxembourg S.A. v. The Canada Customs and Revenue Agency, 2005 FCA 218, will encourage the CRA to continue to use foreign-based requirements more frequently and earlier in the audit process.

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Foreign-based Requirement Under Section 231.6 of the Income Tax Act Upheld by the Federal Court

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 of Appeal deals a blow to the Canada Revenue Agency: Full disclosure must be made on ex parte applications

On February 21, 2013, the Federal Court of Appeal released two decisions related to the obligations of the Minister of National Revenue when making ex parte applications under subsection 231.2(3) of the Income Tax Act (the “Act”) for judicial authorization requiring taxpayers to produce certain information and documents relating to customers.  In Minister of National Revenue v. RBC Life Insurance Company et al., 2013 FCA 50, the FCA affirmed the decision of the Federal Court (reported at 2011 FC 1249) cancelling four authorizations issued by the Federal Court in relation to customers of the Respondent companies who had purchased a particular insurance product that has been described as “10-8 insurance plans”.  In Minister of National Revenue v. Lordco Parts Ltd., the FCA adopted its reasoning in RBC and again affirmed a judgment of the Federal Court cancelling an authorization that had required information in respect of certain employees of the Respondent.

In both cases, the FCA reaffirmed the Minister’s “high standard of good faith” and the powers of the Federal Court to curtail abuses of process by the Crown.

In RBC, the Minister argued that the facts that it failed to disclose on its ex parte application before the Federal Court were not relevant to the applications. Reviewing the judgment of the Federal Court, the FCA concluded that the Minister failed to disclose the following facts:

  • The Department of Finance’s refusal to amend the Act;
  • Information in an advance income tax ruling;
  • CRA’s decision to “send a message to the industry” to chill the 10-8 plans; and
  • The GAAR committee had determined the plans complied with letter of Act.

The FCA held that the Federal Court’s finding that these facts were relevant was a question of mixed fact and law and the Minister had not demonstrated palpable and overriding error by the Federal Court judge. At a minimum, this suggests the Crown may have to disclose information of the sort included in the enumerated list.  Examining that list is interesting and suggests a requirement to include in the disclosure to the Federal Court judge hearing an ex parte application facts related to legislative history and intent including discussions about potential problems and possible legislative “fixes”, internal analysis of issues within the CRA including other advance income tax rulings, motivations on the part of the CRA and its officers and agents that may extend beyond auditing the particular facts, and previous analysis of the facts known  to the CRA and indications that those facts might support compliance with the Act and inapplicability of the GAAR.  That is a very extensive list, and it is encouraging to know that Crown obligations extend into each of these areas.

Further, the FCA held that even if the Federal Court on review of an ex parte order determined that the Minister had a valid audit purpose, it was open to the Federal Court to cancel the authorization based on the Minister’s lack of disclosure.  Somewhat surprisingly, the Minister argued that section 231.2(6), unlike section 231.2(3), did not allow for judicial discretion. Once the statutory conditions are established, the Minister argued, the Federal Court judge MUST NOT cancel the authorizations, no matter how egregiously the Crown acted.  The FCA rejected this argument, reaffirming the importance of judicial discretion and the duty of the Minister to act in good faith:

[26] In seeking an authorization under subsection 231.2(3), the Minister cannot leave “a judge…in the dark” on facts relevant to the exercise of discretion, even if those facts are harmful to the Minister’s case: Derakhshani, supra at paragraph 29; M.N.R. v. Weldon Parent Inc., 2006 FC 67 at paragraphs 153-155 and 172. The Minister has a “high standard of good faith” to make “full disclosure” so as to “fully justify” an ex parte order under subsection 231.1(3): M.N.R. v. National Foundation for Christian Leadership, 2004 FC 1753, aff’d 2005 FCA 246 at paragraphs 15-16. See also Canada Revenue Agency, Acquiring Information from Taxpayers, Registrants and Third Parties (issued June 2010).

The Minister’s argument, the FCA held, also runs contrary to the inherent power of the Federal Court to “redress abuses of process, such as the failure to make full and frank disclosure of relevant information on an ex parte application” (para 33):

The Federal Courts’ power to control the integrity of its own processes is part of its core function, essential for the due administration of justice, the preservation of the rule of law and the maintenance of a proper balance of power among the legislative, executive and judicial branches of government. Without that power, any court – even a court under section 101 of the Constitution Act, 1867 – is emasculated, and is not really a court at all. (para 36)

Overall, the RBC decision strongly reaffirms the role of the Federal Court in ensuring the Minister acts in good faith when making ex parte applications.  Given the broad powers granted in subsection 231.2(3) and elsewhere in the Act, it is reassuring to know that the Courts can, and will, protect taxpayers and citizens generally by ensuring that the CRA puts all relevant information before the Court when it seeks to exercise those powers.

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Federal Court of Appeal deals a blow to the Canada Revenue Agency: Full disclosure must be made on ex parte applications

Federal Court decides that JP Morgan’s judicial review application challenging the Minister’s decision to assess Part XIII tax may proceed

In a decision released on November 26, 2012 in JP Morgan Asset Management (Canada) Inc. v. Minister of National Revenue and Canada Revenue Agency (Docket T-1278-11), Justice Leonard Mandamin of the Federal Court dismissed the Crown’s appeal of an order by Prothonotary Aalto in JP Morgan Asset Management (Canada) Inc. v. Minister of National Revenue and Canada Revenue Agency in which the Crown moved unsuccessfully to strike out a judicial review application on the basis that the taxpayer had no possibility of success in seeking to set aside the decision of the Minister of National Revenue (the “Minister”) to assess Part XIII tax in a manner contrary to the Minister’s own policy.

This decision is the latest in a series of defeats for the Crown on this issue.  Since the decision of the Supreme Court of Canada in Canada v. Addison & Leyen Ltd., [2007] 2 S.C.R. 793, there has been a vigorous debate around the limits of judicial review of Ministerial action involving the decision to issue an assessment and the scope of section 18.5 of the Federal Courts Act which reads as follows:

Despite sections 18 and 18.1, if an Act of Parliament expressly provides for an appeal to the Federal Court, the Federal Court of Appeal, the Supreme Court of Canada, the Court Martial Appeal Court, the Tax Court of Canada, the Governor in Council or the Treasury Board from a decision or an order of a federal board, commission or other tribunal made by or in the course of proceedings before that board, commission or tribunal, that decision or order is not, to the extent that it may be so appealed, subject to review or to be restrained, prohibited, removed, set aside or otherwise dealt with, except in accordance with that Act.

The Minister has consistently intepreted the decision of the Supreme Court in Addison & Leyen and section 18.5 of the Federal Courts Act as precluding judicial review of the Minister’s decision to issue an assessment.  Thus far, however, the Crown has been largely unsuccessful in striking out such judicial review applications in Federal Court.  See, for example, the decision of Prothonotary Aalto in Chrysler Canada Inc. v. Canada and the decision of Justice Hughes on appeal in Chrysler Canada Inc. v. Canada.

By way of background, the Minister assessed Part XIII tax against JP Morgan in respect of fees it had paid to non-resident affiliates between 2002 and 2008.  JP Morgan applied for judicial review of the Minister’s decision to assess it for amounts payable under Part XIII of the Income Tax Act.  In particular, JP Morgan alleged that in exercising discretion to assess for years other than the current year and the two immediately preceding years

. . . CRA did not consider, or sufficiently consider, CRA’s own policies, guidelines, bulletins, internal communiqués and practices which would otherwise have limited assessments to the current tax year and the two (2) immediately preceding years.  CRA thus acted arbitrarily, unfairly, contrary to the rules of natural justice and in a manner inconsistent with CRA’s treatment of other tax payers.

The Crown moved to strike the application for judicial review, relying on section 18.5 of the Federal Courts Act.  Citing his earlier decision in Chrysler Canada, the Prothonotary dismissed the Crown’s motion.  He held that JP Morgan’s judicial review application dealt with:

. . . the discretion to assess as described in various policies of CRA.  That decision to apparently depart from policies and assess is subject to judicial review and is the type of situation that is contemplated by Addison & Leyen.  The ITA provides that the Minister “may” assess not “shall” assess which connotes a discretionary decision.  The decision of the Minister to apparently depart from policies is not otherwise reviewable [by the Tax Court of Canada] and therefore is subject to judicial review.

Consistent with his earlier decision in Chrysler Canada, the Prothonotary held that “JP Morgan only seeks judicial review of the decision to reassess which is alleged to be contrary to policies of CRA which were in place.  No attack on the reassessments is in play.” In his view, the case was about the Minister’s discretion to assess, not the assessments themselves.

Justice Mandamin dismissed the Crown’s appeal of the Prothonotary’s decision as he did not find that the Prothonotary’s Order was clearly wrong in that the exercise of discretion was based upon a wrong principle or a misapprehension of the facts and there was no improper exercise of discretion on a question vital to the case arising with the Prothonotary’s dismissal of the Crown’s motion to strike.

It is not yet known whether the Crown will appeal the decision of Justice Mandamin in JP Morgan, but it would not be surprising in light of the fact that several Crown motions to strike such judicial review applications are currently before the Federal Court.

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Federal Court decides that JP Morgan’s judicial review application challenging the Minister’s decision to assess Part XIII tax may proceed