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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

Canada Revenue Agency confirms that it will follow the decision of the Federal Court of Appeal in Bozzer v. Canada on interest relief for taxpayers

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.]

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Canada Revenue Agency confirms that it will follow the decision of the Federal Court of Appeal in Bozzer v. Canada on interest relief for taxpayers

Winning the battle but losing the war: Federal Court of Appeal decides that the Canada Revenue Agency acted unreasonably in denying request to cancel penalties and interest on late-filed T1135 forms, but dismisses the appeals

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.

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Winning the battle but losing the war: Federal Court of Appeal decides that the Canada Revenue Agency acted unreasonably in denying request to cancel penalties and interest on late-filed T1135 forms, but dismisses the appeals

When will Penalties and Interest be Cancelled on the Late Filing of Foreign Income Verification Statements? Stemijon Investments Ltd. v. Attorney General of Canada

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.

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When will Penalties and Interest be Cancelled on the Late Filing of Foreign Income Verification Statements? Stemijon Investments Ltd. v. Attorney General of Canada