A Canada Revenue Agency (“CRA”) audit initiative is targeting taxpayers who have recently sold condominium units they did not occupy or occupied for only a short period of time (the “CRA Condo Project”).

The CRA is reassessing some of these dispositions on the basis that the condo was sold in the course of business, treating the profit as income (instead of capital gains) and, in some cases, assessing gross negligence penalties under subsection 163(2) of the Income Tax Act. In doing so, the CRA may be incorrectly reassessing some taxpayers whose gains are legitimate capital gains and that may be subject to the principal residence exemption (click here for a discussion of the principal residence exemption).

Consider this example. A taxpayer signs a pre-construction purchase agreement for a condo in 2007.  In 2009, the unit was completed and occupied by the taxpayer, before the entire development was finished and registered in land titles.  Land titles registration occurs in 2010, but shortly thereafter the taxpayer sells the condo for a profit.  Ordinarily, one would conclude the condo was held on account of capital and the gain would be at least partially exempt from tax on the basis that condo was the taxpayer’s principal residence.  The CRA may be inclined to reassess on the basis that land title records show the taxpayer on title for only a short time, as though the taxpayer had intended to merely “flip” the condo rather than reside in it.

This assessing position may be incorrect because the buyer of a condo does not appear on title until the entire condominium development is registered.  In fact, several years can pass from the date of signing the purchase agreement to occupancy to land titles registration – and, accordingly, the taxpayer’s actual length of ownership will not be apparent from the land title records.

This type of situation could cause serious problems for some taxpayers. If a taxpayer is audited and subject to reassessment on the basis that their entire gain should be taxed as income, the taxpayer will need to gather evidence and formulate arguments in time to respond to an audit proposal letter within 30 days, or file a Notice of Objection within 90 days of the date of a reassessment.

Taxpayers could respond to such a reassessment by providing evidence that they acquired the condo with the intent that it would be their residence, and that the subsequent sale was due to a change in life circumstances.  Taxpayers may wish to gather the following evidence to support such claims:

• Purchase and sales agreements;
• Letter or certificates granting permission to occupy the condo;
• Proof of occupancy, such as utility bills, bank statements, CRA notices, identification (such as a driver’s license) showing the condo as a residence; or
• Evidence of a change in life circumstances which caused the condo to no longer be a suitable residence, including:
  • Marriage or birth certificates;
  • A change of employer or enrollment in education that required relocation; or
  • Evidence showing the taxpayer cared for a sick or infirm relative, or had a disability that precluded using a condo as a residence.

Taxpayers should be prepared to provide reasonable explanations for any gaps in the evidence.  If a taxpayer wishes to explore how best to respond in the circumstances, they should consult with an experienced tax practitioner.

At today’s Canada Revenue Agency Toronto Centre Tax Professionals Group Breakfast Seminar (November 14, 2012), the CRA provided an update on a number of current audit issues.

The CRA was represented by Sal Tringali, Regional Technical Advisor of Aggressive Tax Planning, and James McNamara, Manager of International Taxation and Aggressive Tax Planning Audit Division from the Toronto Centre Tax Services Office. The discussion was moderated by Jacques Bernier (Baker McKenzie LLP) and Rachel Gervais (BDO Canada LLP).

The audit issues highlighted by the panel included the following:

GST/HST

1. Recapture input tax credit
2. ITC allocation % – mixed supplies
3. Financial services
4. Imported supplies
5. Reinsurance/loading
6. Loyalty reward points
7. VDP – Related parties

Income Tax

Additionally, the CRA made the following comments:

• The CRA’s access to/requests for accountants’ working papers remains a “hot topic”. Generally speaking, the CRA will first ask the taxpayer for information/documents, after which the CRA may request information/documents from the taxpayer’s accountants. The CRA’s objective is to perform high-quality audits, and access to complete information is required to do so.

• The CRA reminded taxpayers of its recent announcement that the CRA will not assess a taxpayer’s return where the taxpayer has claimed a charitable donation and the alleged gift is made as part of a donation arrangement. The delay in assessing the return could be two years or more (see Jamie Golombek’s recent article on the subject).

• The CRA is considering a variety of provisions that may be applied where the taxpayer has used a structure to divert business income to RRSPs through trusts and partnership interests held by shareholders or key employees. (See also the CRA’s announcement at the Canadian Tax Foundation’s 2012 Ontario Tax Conference, at which the CRA stated that it may apply s. 56(2) to the actions of a trustee.)

• The CRA has appealed the Tax Court’s decision in Guindon v. The Queen to the Federal Court of Appeal. In light of the Tax Court’s decision, the CRA is currently considering its options in respect of the assessment of third party penalties.

• The CRA has considered the application of third party penalties in 185 cases. In 71 of those cases the penalty was applied, resulting in the imposition of $79 million of penalties. In 50 cases the penalty was not applied, and 64 cases are ongoing.

• The CRA will continue to revoke e-file privileges where a tax preparer is subject to a penalty, even where a penalty against a single tax preparer may result in the revocation for his or her entire firm.

• The CRA referred to the recent Supreme Court decision in GlaxoSmithKline v. The Queen and stated that it intends to follow the new OECD guidelines on transfer pricing and the hierarchy of pricing methods. The CRA said that it did not expect to release any formal communication to the public on this issue, but Information Circular IC 87-2R “International Transfer Pricing” may be updated to reflect this position.

UPDATE: After the seminar, the CRA informed us that it intends to follow the guidance in the recently updated OECD Guidelines and will be issuing a Transfer Pricing Memoranda (TPM) on the matter to the public. This TPM will reflect a recently released internal Communique on the same subject and will be made available in the near future.

• The CRA clarified that Tax Earned By Audit (“TEBA”) remains a metric for measuring ”tax at risk”, but it is not used to measure the performance of an auditor. Rather, the CRA measures the performance of auditors based on six major elements: (i) planning the audit, (ii) conducting the audit, (iii) applying the appropriate legislation/policy, (iv) the end product of the audit, (v) professionalism in the audit, and (vi) timeliness of completion of the audit.

• The CRA plans to convene face-to-face meetings with approximately 160 large businesses (i.e., annual sales over $250 million) as part of the CRA’s large business audit project. The CRA will continue to risk-assess all large businesses/entities annually.

• The CRA intends to clear a backlog of approximately 1,300 audit files so that it may assess the most recent taxation year and the immediately preceding taxation year for most businesses by 2015-16.

• The CRA reiterated that issues that arise during the audit process should be raised with the auditor, after which it may be appropriate to involve the auditor’s team leader. If the issue cannot be resolved at that level, it would be appropriate to raise the issue with the auditor’s manager or the assistant director of audit at the particular TSO.

On October 31, 2012, the Crown filed a Notice of Appeal with the Federal Court of Appeal against the judgment of the Tax Court of Canada in Julie Guindon v. The Queen (2012 TCC 287). In that decision, the Tax Court held that the advisor penalties imposed under section 163.2 of the Income Tax Act were criminal in nature, and therefore attract constitutional protection under the Canadian Charter of Rights and Freedoms. The Court also held that the standard of “culpable conduct” in section 163.2 was a higher standard than “gross negligence” as the latter has been interpreted in the context of subsection 163(2) penalties. For a more detailed review of the Tax Court decision, see our previous post here.

In particular, the Crown has appealed the Tax Court’s finding that the Charter applies to section 163.2 penalties, and the determination of the Court that “culpable conduct” is a different standard than “gross negligence”.

The advisor, who was found to have engaged in culpable conduct (and therefore would have been subject to the assessed penalty had the court not found the penalty to be criminal in nature) has yet to file a cross-appeal on that point.

Stay tuned to www.canadiantaxlitigation.com for further updates on this important appeal.

The Tax Court of Canada recently released its decision in Guindon, a case concerning the application of third-party penalties under section 163.2 of the Income Tax Act (the
“Act”). The Court found that the penalty imposed under section 163.2 of the Act is a
criminal penalty, not a civil one, and therefore subject to the same constitutional protections as other penal statutes enacted by the federal government.

Click here to read more.

In what is certain to be the first step in a very important precedent, the Tax Court of Canada held on October 2, 2012 that the advisor penalties created under section 163.2 of the Income Tax Act constitute criminal offences and entitle the taxpayer to all of the constitutional protections that entails, including a standard of proof beyond a reasonable doubt: Guindon v. The Queen, 2012 TCC 287.

The case involved a tax avoidance scheme that was deeply flawed from a technical perspective:

[1] The participants in a donation program (the “Program”) were to acquire timeshare units as beneficiaries of a trust for a fraction of their value and donate them to a charity in exchange for tax receipts for the actual value of the units. No donation ever took place as the timeshare units never existed and no trust was settled. The Minister of National Revenue (the “Minister”), on the basis that the Appellant made, participated in, assented to or acquiesced in the making of 135 tax receipts that she knew, or would reasonably be expected to have known, constituted false statements that could be used by the participants to claim an unwarranted tax credit under the Income Tax Act (the “Act”), assessed against the Appellant on August 1, 2008 penalties under section 163.2 of the Act in the amount of $546,747 in respect of false statements made in the context of that donation program. The Appellant appealed the assessment.

The appellant was a lawyer with no experience or expertise in tax law. Nevertheless she prepared an opinion that was used by the Program promoters to attract potential donors. The opinion was found to be badly flawed and purported to rely upon documentation which the appellant had never examined (and which, in fact, did not exist):

[105] The Appellant wrote and endorsed a legal opinion regarding the Program, an opinion which she knew would be part of a promotional package intended for potential participants in the Program. Her legal opinion clearly states that she reviewed the principal documents relating to the Program when these documents had in fact never been provided to her. She knew, therefore, that her legal opinion was flawed and misleading.

[106] The Appellant chose to rely on the Program’s Principals. They pressured her into providing them with an executed version of the legal opinion without providing her with the supporting documents on which to found her opinion. Yet her legal opinion does not reflect this reality. Rather, it indicates that the documents were reviewed.

[107] When the Appellant chose to involve the Charity in the Program and, later, to sign the tax receipts, she knew she could not rely on her legal opinion. She again decided to rely on the Principals. However, the Principals had relied on the Appellant to attest the legality of the Program. The Appellant knew her legal opinion could not be relied on and, for that reason, she could not be entitled to blindly rely on the Principals. In other words, the Appellant would have been entitled to rely on the Principals if a different professional had signed the legal opinion. She could not, however, rely on her own legal opinion which she knew to be incomplete.

[108] Her conduct is indicative either of complete disregard of the law and whether it was complied with or not or of wilful blindness. The Appellant should have refrained from involving the Charity and signing the tax receipts until she had either reviewed the documents herself or had another professional approve the Program’s activities. When the Appellant issued the tax receipts, she could have reasonably been expected to know that those receipts were tainted by an omission, namely, that no professional had ever verified the legal basis of the Program.

[109] The Appellant cannot agree to endorse a legal opinion and then justify her wrongful conduct by saying she did not have the necessary knowledge — either of tax law or of foreign law — to write that opinion.

[110] Moreover, the Appellant’s conduct after the tax receipts were signed negatively affects her credibility and reflects badly on her character. When the Appellant was informed, after the tax receipts had been issued, that the legal titles were not in order, she co-signed a letter informing the participants of the situation. At that point, the Appellant knew she could not rely on the Principals — the same individuals who had never provided her with the documents she was supposed to review and the same individuals she had trusted in signing the tax receipts. Yet when Ploughman sent out a letter, days before the end of the fiscal year, stating that all was in order and that the participants could submit their receipts, the Appellant blindly relied on him again, without asking any further questions.

Thus, it is reasonably clear that if the test under section 163.2 were a normal burden of “balance of probabilities” the advisor penalties against the appellant would have been sustained.

Justice Bédard, however, performed a very thorough and detailed analysis of section 163.2 to determine whether the penalties imposed amounted to criminal sanctions. At the end of that careful analysis he concluded that they did create criminal offences and allowed the appeal:

[69] The Respondent submits that it is not the penalty that would stigmatize the Appellant but rather her unlawful conduct and the professional sanctions that could result from it. What the Respondent fails to recognize is that this judgment, when rendered, will be public. That professional sanctions may be imposed subsequently does not alter the fact that there will be a public document setting out all the details of the Appellant’s conduct, whether that conduct was found to qualify as culpable conduct or not, and indicating the amount of the penalty that she is being assessed. This constitutes a form of stigma which one should not fail to consider.

[70] In conclusion, applying the rationale enunciated in Wigglesworth, section 163.2 of the Act should be considered as creating a criminal offence because it is so far-reaching and broad in scope that its intent is to promote public order and protect the public at large rather than to deter specific behaviour and ensure compliance with the regulatory scheme of the Act. Furthermore, the substantial penalty imposed on the third party — a penalty which can potentially be even greater than the fine imposed under the criminal provisions of section 239 of the Act, without the third party even benefiting from the protection of the Charter — qualifies as a true penal consequence.

This case will almost undoubtedly be appealed, quite possibly to the Supreme Court of Canada. Nevertheless, the rationale of the decision seems balanced and well-reasoned. If it is sustained on appeal it may very well sound the death knell for advisor penalties under section 163.2 since the burden of proof on the Crown, i.e., proof beyond a reasonable doubt, will normally be far too onerous to justify prosecuting such penalties.

In Hine v. The Queen (2012 TCC 295), a decision released last week, the Tax Court of Canada considered whether a taxpayer was “grossly negligent” in relying on his accountant (who happened to be his wife) to prepare his tax return, and whether the taxpayer’s written offer to settle (asking the Crown to concede entirely) should be considered when making a cost award.

The decision in Hine is helpful in determining (a) whether the taxpayer was grossly negligent in relying entirely on his tax preparer, and (b) whether a settlement offer may be ignored by the Tax Court in awarding costs.

Gross Negligence – 163(2)

The taxpayer was a general contractor who was in the business of “flipping” homes. In 2006, he sold a renovated house for $319,000. The taxpayer reported a loss of $131,653 for the year. In the course of an audit that commenced in 2008, the CRA discovered that the taxpayer had failed to report $157,965 of business income on the sale of the house. The CRA reassessed to include the additional income and imposed a gross negligence penalty under subsection 163(2) of the Income Tax Act. Only the gross negligence penalty was at issue in the appeal.

Generally, under subsection 163(2), the CRA may impose a penalty equal to the greater of $100 and 50% of the avoided tax where the taxpayer knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in a return.

The courts have been consistent in holding that a high degree of negligence or intentional acting is required in order for the gross negligence penalty to apply (see, for example, Udell v. M.N.R., 70 DTC 6019 (Ex. Ct.)). However, there has been less consistency in the application of the penalty where the taxpayer relied on the work of his/her tax preparer. Generally, in such cases, there must be gross negligence on the part of the tax preparer, and there must be some element of privity or wilful blindness on the part of the taxpayer such that he/she acquiesced in the making of the false statement or should have taken further steps to confirm the accuracy of the return.

In Hine, the taxpayer handed over responsibility for the bookkeeping and tax returns to his wife, who had a background in financial accounting but was not a professional accountant. The taxpayer relied entirely on his wife to keep proper records and prepare his returns. The wife’s error resulted in the underreported income, and neither the taxpayer nor his wife detected the error before filing the return.

In argument, the taxpayer relied on a line of cases establishing that reliance on professional advisors does not necessarily lead to a finding of gross negligence (see, for example, Findlay v. The Queen (2000 DTC 6345 (Fed. C.A.)), Gallery v. The Queen (2008 TCC 583) and Down v. M.N.R. (93 DTC 591) (T.C.C.)). The Crown relied on a line of cases that states that a taxpayer cannnot escape his or her own liability under subsection 163(2) by simply handing over all tax affairs to a professional advisor (see, for example, Panini v. The Queen (2006 FCA 224), Hougassian v. The Queen (2007 TCC 293) and Brygman v. M.N.R. (79 DTC 858) (Tax R.B.)).

The Tax Court found that the taxpayer and his wife intended to be diligent and accurate in reporting the taxpayer’s income, and an honest confusion led to the error.

Finally, the Tax Court held that the determination of the issue of whether the taxpayer and his advisor were grossly negligent was unaffected by the their spousal relationship. On the facts of the case, the taxpayer’s “blind faith in his wife” was not unreasonable. The Tax Court allowed the taxpayer’s appeal.

Costs

After the court’s decision, the taxpayer sought costs above the usual tariff amounts on the basis that a settlement offer had been made before the hearing. The taxpayer argued that the offer should be considered under paragraph 147(3)(d) of the Tax Court of Canada Rules (General Procedure) and enhanced costs awarded.

In his written offer, the taxpayer had set out certain submissions he intended to make at the hearing and argued that the gross negligence penalty was unsupportable. The taxpayer offered to settle the matter, without costs, if the Crown reassessed accordingly (i.e., conceding the penalty in its entirety). The taxpayer stated that if the Crown did not accept the settlement offer the taxpayer would seek solicitor and client costs if successful at trial. The Crown rejected the offer.

The Tax Court dismissed the taxpayer’s request for enhanced costs and stated that “… An ‘offer’ that the other party to the litigation withdraw in order to avoid a threat of enhanced costs cannot, in this circumstances, be considered to be an ‘offer of settlement’.” Further, the court stated that, “To have ‘settled’ the case as offered by the Appellant would have been to abdicate the responsibilities imposed on the Department of Justice.” (See also CIBC World Markets Inc. v. The Queen (2012 FCA 3) on the difficulties of making a settlement offer where there is a “yes-no” question at issue in the appeal.)

Accordingly, parties to a tax dispute should ensure that their offers are “settlement” offers and not “withdrawal” offers and that the offer is the type of offer that can indeed be accepted by the other party. Otherwise a court may decline to consider the offer when assessing costs.

On November 21, 2011, the Canada Revenue Agency (CRA) issued a news release entitled “Taxpayer relief deadline is December 31, 2011“, which confirms that it formally accepts the interpretation of the 10-year limitation period for interest relief established by the Federal Court of Appeal in Bozzer v. Canada.

Before the Federal Court of Appeal decision in Bozzer, the CRA took the position that the Minister may exercise his discretion to cancel or waive interest otherwise payable under the Income Tax Act only if a taxpayer applies within 10 calendar years of the end of the taxation year in which the underlying tax debt arose. The Federal Court of Appeal in Bozzer held, however, that the Minister’s discretion allows for the cancellation or waiver of interest that accrues during the 10 calendar years preceding the calendar year in which the request for relief is made, regardless of the year in which the tax debt arose.

Although the Bozzer decision dealt with the interpretation of the 10-year limitation period for interest relief requests in the context of the Income Tax Act, the CRA confirmed in its November 21, 2011 news release that the 10-year limitation period will be interpreted in the same manner with respect to interest relief applications made under the Excise Tax Act, the Air Travellers Security Charge Act, the Softwood Lumber Products Export Charge Act, 2006, and the Excise Act, 2001.

Although the Crown did not seek leave to appeal the decision of the Federal Court of Appeal to the Supreme Court of Canada, it was unclear whether the CRA would actually follow and apply the FCA decision across the board.  For this reason, the news release is most welcome.

[Note: The author, along with David Spiro of Fraser Milner Casgrain LLP, acted as counsel for Mr. Bozzer in the Federal Court of Appeal - Ed.]

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.

On October 26, 2011, the Federal Court of Appeal released its decision in Stemijon Investments Ltd. v. Attorney General of Canada and five related appeals (see our earlier post).  Justice David Stratas wrote for the panel (Justice Marc Noël and Justice Johanne Trudel were the other members) and dismissed taxpayers’ appeals of the Federal Court judgments which rejected their claim that the Minister of National Revenue (the “Minister”) acted unreasonably in deciding not to cancel penalties and interest on late-filed T1135 forms.

By way of background, subsection 233.3(3) of the Income Tax Act requires each taxpayer who owns specified foreign property to file a Form T1135 where the total cost amount of the property is over $100,000.  The taxpayers filed the forms for 1998 and 1999 but did not do so for 2000-2003 until the CRA reminded them to file, which resulted in late filings for those years.

The taxpayers did not initially file the T1135 forms for 2000-2003 as their representative felt that the Canada Revenue Agency was receiving all the information it needed from other filings made by the appellants’ Canadian investment managers.  The foreign investments of almost all the taxpayers were managed by a Canadian investment manager who was already subject to Canadian reporting requirements.  Failing to file the forms in a timely manner for 2000-2003 was, therefore, a conscious decision because the representative believed that the Canada Revenue Agency was receiving information about the taxpayers’ foreign holdings from other filings.

The taxpayers asked for the late-filing penalties and interest to be cancelled.  Their request was denied.  They applied for a second level review where their request was denied.  They applied for judicial review in the Federal Court which found that the Minister’s decision was not unreasonable.  The taxpayers then appealed to the Federal Court of Appeal.

In the Federal Court of Appeal, the taxpayers won the battle, but lost the war.  The Court found that the Minister’s decision was unreasonable as it was based exclusively on whether the facts fit within three specific scenarios set out paragraph 23 of Information Circular IC07-1 (“Taxpayer Relief Provisions”), namely, (a) extraordinary circumstances beyond the taxpayer’s control, (b) actions of the Canada Revenue Agency and (c) inability to pay.  The Minister’s representative did not base his decision on the wider scope of discretion granted to him by law, namely, by subsection 220(3.1) of the Income Tax Act.  The Court concluded that “the scope of the Minister’s discretion [under subsection 220(3.1)] is broader than the three specific scenarios set out in the Information Circular.”  The Court concluded that it was unreasonable for the Minister to proceed as though the source of his decision-making power was the Information Circular and not the law.  As Justice Stratas noted (at paragraph 60):

An administrative policy is not law. It cannot cut down the discretion that the law gives to a decision-maker. It cannot amend the legislator’s law. A policy can aid or guide the exercise of discretion under a law, but it cannot dictate in a binding way how that discretion is to be exercised.

The taxpayers lost the war because, in the words of Justice Stratas (at paragraph 46):

In this case, there would be no practical end served in setting aside the Minister’s decision and returning the matter to him for redetermination. The excuses and justifications offered by the appellants for the delay in filing and the grounds offered in support of relief have no merit. The Minister could not reasonably accept them and grant relief under subsection 230(3.1) of the Act. Returning the matter back to the Minister would be an exercise in futility.

The Court explained that referring the matter back to the Minister would be an exercise in futility because the relief requested could not reasonably be granted on the facts.  The representative filed the T1135 forms on time for 1998 and 1999 but, after that, he “consciously chose not to comply with the Act” as he believed that the CRA was receiving the same information from other sources such as the appellants’ Canadian money managers.  Even if that were the case, Justice Stratas observed, that would be no excuse.  There are a number of other provisions in the Income Tax Act requiring the provision of information from various sources in order to verify compliance (e.g. information provided to the CRA by an employer and its employees).  The Court concluded that the taxpayers could not succeed on the explanations and justifications offered even if the Court returned the matter to the Minister for redetermination.

In addition, the Court observed that it would be an unreasonable exercise of discretion to grant relief on the basis that the imposition of six separate penalties in respect of a single decision by a single representative was unfair.  The Court described the taxpayers’ argument for a ”volume discount” as having “no merit”.

In light of the Court’s conclusion that the Minister’s decision was unreasonable, most observers would have expected the matter to be sent back to the Minister for redetermination as a matter of course.  The decision is significant as it may signal a more activist approach by the Federal Court of Appeal on judicial review matters.  Time will tell whether the courts will be more inclined to make decisions that the Minister ought to have made rather than routinely sending matters back to the Minister for redetermination.  If so, this decision may prove to be a harbinger of a much more complex era for judicial review of ministerial decisions.

A panel of the Federal Court of Appeal (Noël, Trudel and Stratas, JJ.A.) heard arguments this morning in Ottawa on appeals from judgments of the Federal Court which held that the Canada Revenue Agency acted reasonably in deciding not to cancel or reduce penalties and arrears interest on late-filed T1135 forms. See our earlier blog post for more information on the background to this case.

The Appellants’ main argument to the panel was that the Minister of National Revenue had improperly fettered his discretion in deciding that certain penalties and arrears interest should not be cancelled or reduced. In particular, the Appellants emphasized the fact that the CRA official, in his written reasons, held that the Appellants did not fit within the categories set out in the Taxpayer Relief Guidelines and thus that the Minister could not grant the request for relief. This, the Appellants argued, showed that the Minister did not appreciate or understand that he had unfettered discretion to provide relief. The Appellants argued, on the facts and with unfettered discretion, the reasonable conclusion would have been to grant relief.

Justice Stratas noted that on the reasonableness standard of review, a reviewing court may look to what might have been the reasons of the decision-maker.  In response, counsel for the Appellants responded that in Canada (Citizenship and Immigration) v. Khosa, the Supreme Court of Canada held that that what could have been the reasons of the decision-maker should not dilute the importance of giving reasons.

After putting the issue of “missing justification” to Crown counsel (who argued that cross-examination transcripts showed the CRA official had in fact considered all of the facts before him at the time), Justice Stratas wondered whether the CRA’s later justification was really just an exercise in bootstrapping. Members of the panel appeared concerned that taxpayers are obliged to file applications for judicial review simply in order to obtain an answer to their request for relief. Counsel for the Appellants argued that taxpayers “deserve the attention of the Minister” for their specific circumstances, given the nature of the discretion granted to the Minister under the Income Tax Act.

Justice Noël was interested in the fact that the Appellants failed to file the forms due to a common administrative error. Counsel for the Appellants described the policy objective underlying the penalty provision and argued that a multiplicity of penalties for what was actually just one common error would be disproportionate to the oversight by the taxpayers and would not advance the underlying purpose of the penalty. He argued that the existence of the common error should have had some significance to the exercise of the Minister’s discretion to cancel or reduce the penalties.

The panel reserved judgment.

One week today (October 11, 2011), the Federal Court of Appeal will hear arguments in Ottawa on whether the Federal Court erred in law in deciding that the Canada Revenue Agency acted reasonably in deciding not to waive penalties and interest on the late filing of Form T1135 (Foreign Income Verification Statement).

The panel scheduled to hear the appeal is Mr. Justice Marc Noël, Madam Justice Johanne Trudel and Mr. Justice David W. Stratas. 

See our earlier blog post to read the decision of the Federal Court, a case comment by Jamie Golombek and the written submissions of each party in the Federal Court of Appeal.

On October 11, 2011, the Federal Court of Appeal is scheduled to hear an appeal by Stemijon Investments Ltd. (and four other taxpayers) against a decision by the Federal Court dismissing a judicial review application challenging a decision by the Canada Revenue Agency denying a request for taxpayer relief from penalties and arrears interest reassessed because of late filing of T1135 forms concerning foreign investment property.

For commentary on the Federal Court decision, see ”A Late T1135 Can be Costly” by Jamie Golombek (November 17, 2010).

For the appellant’s notice of appeal, see the Notice of Appeal of Stemijon Investments Ltd.

For the written submissions of the appellant, see the Memorandum of Fact and Law of Stemijon Investments Ltd.

For the written submissions of the respondent, see the Memorandum of Fact and Law of the Attorney General of Canada.