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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

B.C. Supreme Court Rescinds Land Transfers

In Re 0741508 BC Ltd and 0768723 BC Ltd  (2014 BCSC 1791), the British Columbia Supreme Court (“BCSC”) considered whether rescission should be granted in respect of two real estate transactions in which the applicant corporations had transferred several parcels of land to a partnership.

The transactions were undertaken as part of a proposed commercial development of the land. The parties intended – in accordance with industry practice – that there would be no net GST/HST payable on the land transfers (i.e., the GST/HST payable would be offset by an input tax credit).

However, the partnership was not registered for GST/HST purposes under the Excise Tax Act (“ETA”) and accordingly the input tax credit was not available. The CRA audited members of the corporate group and reassessed nearly $6 million in GST/HST and penalties.

The parties brought an application to the BCSC for rescission of the transfers (i.e., to effectively put the property back in the hands of the selling corporations).

The application was opposed only by the CRA, which argued that rescission should not be available as the mistake in question was not related to the purpose of the transaction but only its consequences. In Gibbon v Mitchell ([1990] 1 W.L.R. 1304 (Ch.), a U.K. court held that rescission would be granted for a mistake where “the mistake is as to the effect of the transaction itself and not merely as to its consequences or the advantages to be gained by entering into it”. Similar reasoning was followed by the Ontario court in 771225 Ontario Inc. v Bramco Holdings Co Ltd. ([1994] 17 O.R. (3d) 571 (Gen. Div.)), which held that an assessed land transfer tax “was a consequence of the transaction, rather than its purpose, and therefore the case did not fall within the strict confines of the rule for granting relief.”

In considering whether to exercise its discretion to order equitable rescission, the BCSC cited McMaster University v Wilchar Construction Ltd. ([1971] 3 O.R. 801 (H.C.)):

In equity, to admit of correction, mistake need not relate to the essential substance of the contract, and provided that there is mistake as to the promise or as to some material term of the contract, if the Court finds that there has been honest, even though inadvertent, mistake, it will afford relief in any case where it considers that it would be unfair, unjust or unconscionable not to correct it.

In the present case, the BCSC noted that, in Re: Pallen Trust (2014 BCSC 305) the court had rejected Gibbon and instead relied on the test adopted in the U.K. Supreme Court decision in Pitt v Commissioners for Her Majesty’s Revenue and Customs ([2013] UKSC 26) to determine whether to rescind a voluntary transaction.

Equitable rescission, under Pallen, would be available where there was a “causative mistake of sufficient gravity” as to the “legal character or nature of the transaction, or as to some matter of fact or law which is basic to the transaction” such that it would be unconscionable, unjust or unfair not to correct the mistake.

The BCSC noted that, in the transactions at hand, the intention of the parties had always been that the partnership would be registered under the ETA so that no net GST/HST would be payable. This was distinguishable from Bramco, where there had never been a specific intention to minimize the applicable tax.

The BCSC reiterated the principle set out in McMaster and Pallen that “if there has been an honest, even though inadvertent mistake, equity will afford relief in any case that the court considers that it would be unfair, unjust, or unconscionable not to correct it” and held that it would be unfair and unjust for either Canada and/or the Province to gain over $6 million plus accruing interest solely because of a mistake in not registering under the ETA.

The BCSC granted the rescission and held that there was “no adequate legal remedy available, the petitioners are not seeking to carry out retroactive tax planning, and there is no prejudice to third parties.”

The Court did not explicitly consider whether the mistake met the threshold of being of sufficient gravity as to the legal character, nature of the transaction, or as to some matter of fact or law which is basic to the transaction.  Presumably, the punitive and negative results of the transaction were sufficiently grave – that is, the mistake about the fact as to whether ETA registration had been completed was sufficiently grave – that the Court found rescission should be granted.

Pallen has been appealed to the B.C. Court of Appeal.  It will be interesting to see if the present case is appealed as well.  Either way, the equitable doctrine of rescission continues to develop in the context of unintended tax consequences.

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B.C. Supreme Court Rescinds Land Transfers

The importance of a notice of objection: Salisbury v. The Queen

In Salisbury House of Canada Ltd. et al. v. The Queen (2013 TCC 236), the Tax Court of Canada reiterated the importance of the statutory preconditions that must be met before a taxpayer may appeal to the Court. These statutory requirements should be kept in mind by taxpayers who wish to ensure their disputes are heard on the substantive merits rather than dismissed for procedural reasons before they have an opportunity to argue their case.

In Salisbury, the corporate taxpayer operated several restaurants in the Winnipeg area. The company was assessed additional GST for the period February to June, 2006 but did not object to those assessments. Around the same time, a new board of directors was elected. Due to financial difficulties, the company made a proposal under the Bankruptcy and Insolvency Act and attempted to negotiate an agreement with the CRA pertaining to the GST arrears. The parties eventually agreed that a portion of the GST liability would be paid. Importantly, at this point, no directors’ liability assessments had been issued under s. 323 of the Excise Tax Act. Payment was remitted, but the directors sought to have their potential liability for tax determined “by a court of competent jurisdiction”.

The company and the individual directors each filed a Notice of Appeal in the Tax Court. In response, the Crown brought a motion to dismiss the appeals pursuant to paragraph 53(b) of the Tax Court of Canada Rules (General Procedure) on the grounds that (inter alia) the appeals were scandalous, frivolous or vexatious.

Under section 306 of the Excise Tax Act, a taxpayer must file a notice of objection before a Notice of Appeal may be filed in the Tax Court. In Salisbury, the GST assessments against the corporate taxpayer had not been challenged by way of objection and there had been no assessments issued against the directors.  The Minister argued that the appellants had no statutory right of appeal because the requirements of section 306 had not been met.

The Tax Court granted the Minister’s motion and dismissed the appeals. Since no notices of objection had been filed by the company, this precluded an appeal from the original GST assessments. In respect of the appeals by the individual directors, the Court held that they too could not succeed – no assessments had been issued, and no notices of objection filed.

The Salisbury decision is consistent with a long line of jurisprudence reflecting the requirement that taxpayers must satisfy the statutory preconditions before appealing to the Tax Court. In Roitman v. The Queen (2006 FCA 266), the Federal Court of Appeal stated that a court “does not acquire jurisdiction in matters of income tax assessments simply because a taxpayer has failed in due course to avail himself of the tools given to him by the Income Tax Act.” More recently, in Goguen v. The Queen (2007 DTC 5171), the Tax Court reiterated that, as “a matter of law, the failure of the [taxpayer] to serve a notice of objection on the Minister deprive[s] the Tax Court of Canada of the jurisdiction to entertain an appeal in relation to the assessment” (see also Whitford v. The Queen (2008 TCC 359), Bormann v. The Queen (2006 FCA 83), and Fidelity Global Opportunities Fund v. The Queen (2010 TCC 108)).

Salisbury reminds corporate and individual taxpayers of the need to obtain proper advice from tax professionals with respect to their rights and obligations under the Excise Tax Act and the Income Tax Act. This is all the more important in cases where the corporation is experiencing financial difficulty and/or contemplating protection under the Bankruptcy and Insolvency Act (i.e., as the CRA may be a primary creditor). In Salisbury, the directors may not have been personally liable for corporate taxpayer’s GST liability. However, because of the manner and timing of the payment of GST arrears, their “appeal” to the Tax Court was defeated on procedural rather than substantive grounds and they were, unfortunately, precluded from presenting their case.

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The importance of a notice of objection: Salisbury v. The Queen