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.