Date: 20080923
Docket: T-1528-07
Citation: 2008 FC 1073
Ottawa, Ontario, September 23, 2008
PRESENT: The Honourable Madam Justice Simpson
BETWEEN:
LINDSAY
KERR
Applicant
and
ATTORNEY
GENERAL (CANADA REVENUE AGENCY)
Respondent
REASONS FOR JUDGMENT AND JUDGMENT
[1]
Lindsay
Kerr, the self-represented applicant (the Applicant) seeks Judicial Review
pursuant to section 18.1 of the Federal Courts Act, R.S.C. 1985, c. F-7
of a decision made on July 25, 2007 (the Decision) denying her request for
a waiver under subsection 204.1(4) of the Income Tax Act, R.S.C. 1985,
c. 1 (5th Supp.) (the Act) of tax assessed under Part X.1 of the Act (the Part
X.1 Tax).
CRA’S ERROR,
THE EXCESS CONTRIBUTIONS AND THEIR WITHDRAWAL
[2]
The
Applicant received her Notice of Assessment for the 1996 taxation year on
September 8, 1997. It advised her that her 1997 RRSP contribution limit was
$8,121.00 (the Limit). This number was incorrect and should have read $794.00
(the Error). The Error occurred because the Canada Revenue Agency (CRA) had
incorrectly recorded the Applicant’s 1996 pension adjustment. That number was
keyed in as $814.00 on the Notice of Assessment when the correct figure was, in
fact, $8,141.00.
[3]
The
Limit was approximately four times higher than it had been in earlier years and
there had been no other significant changes in the Applicant’s employment or
income which would have explained the change. The Applicant suspected that an
error had been made and informally canvassed colleagues at work and spoke with her
banker. They all advised her that she could rely on the Notice of Assessment.
[4]
On
February 27, 1998, acting on this advice, the Applicant contributed $8,121.00
to her RRSP for the 1997 taxation year (the Second Excess Contribution). The
Applicant had earlier made a $2,000.00 contribution to her RRSP on the
understanding that taxpayers are allowed to over-contribute to RRSPs by up to
that amount without penalty (the First Excess Contribution). This meant that
the Applicant had made excess contributions in the amount of $9,327.00. This
amount is calculated by taking $10,121.00 which is the total of the First and
Second Excess Contributions less the $794.00 which was the correct RRSP contribution
limit for the 1997 taxation year.
[5]
CRA
compounded the Error in early 1998, when it sent the Applicant a form T1028. It
was a statement of her RRSP deduction limit and it incorrectly stated that the limit
for 1998 was $7,754.00 (calculated by taking the incorrect Limit of $8,121.00
and subtracting the Applicant’s $367.00 Past Service Pension Adjustment for
1998). The correct limit for 1998 was, in fact, $427.00.
[6]
The
Applicant says, and counsel for CRA agreed at the hearing, that the record
before the Court indicates that she was not told the correct amount of her RRSP
deduction limit for the 1997 taxation year until she received a letter dated
April 29, 2004. It was suggested that she knew the correct amount at an earlier
date because she apparently reported it in November 2003, when she filed her
1997 income tax return. However, that return was not in evidence. Accordingly,
I will treat April 29, 2004 as the date the Applicant received notice of
the proper limit for her 1997 RRSP contribution.
[7]
On
April 29, 2004, CRA sent the Applicant a letter (the Withdrawal Letter)
advising her that her actual RRSP deduction limit for 1997 had been $794.00.
CRA also provided two completed versions of Form T3012A (the Forms) so that she
could withdraw $8,121.00 and $1,206.00 from her RRSP on a tax-free basis. The
first amount of $8,121.00 was incorrect. The form should have required her to
withdraw $7,327.00 which was the Second Excess Contribution less the actual
limit of $794.00. Further, there should not have been a second form in any
amount.
[8]
The
Applicant was rightly confused about why she was apparently being required to
withdraw any amount in connection with the First Excess Contribution. The
Respondent now admits that this was an error and that the Applicant could have
left the entire First Excess Contribution in her RRSP without penalty. However,
the Forms made it impossible for the Applicant to withdraw the Second Excess
Contribution leaving in only the allowed amount and effectively required her to
withdraw the entire First Excess Contribution.
[9]
The
Forms were sent to the Applicant so that the excess contributions could be
withdrawn on a tax-free basis. Under subsection 146(8.2) of the Act, a taxpayer
who has not used RRSP contributions as a deduction may be able to withdraw the
unused contributions on a tax-free basis. The relevant portion of the
subsection is reproduced below:
|
Amount deductible
(8.2) Where
…[the overpayment] may be deducted in
computing the taxpayer’s income for the particular year unless it is
reasonable to consider that
(e) the taxpayer did not
reasonably expect that the full amount of the premiums would be deductible in
the taxation year in which the premiums were paid or in the immediately
preceding taxation year, and
(f) the taxpayer paid all or
any portion of the premiums with the intent of receiving a payment that, but
for this paragraph and paragraph 146(8.2)(e),
would be deductible under this subsection
|
Montant déductible
(8.2) Dans le cas où, à la fois :
le contribuable peut
déduire ce [trop-perçu]… dans le calcul de son revenu pour l’année donnée,
sauf s’il est raisonnable de considérer que :
e) d’une part, le contribuable ne s’attendait vraisemblablement pas
à ce que le plein montant des primes soit déductible au cours de l’année
d’imposition de leur versement ou de l’année d’imposition précédente;
f) d’autre part, le contribuable a versé tout ou partie des primes
dans l’intention de recevoir un paiement qui, compte non tenu du présent alinéa
et de l’alinéa e), serait déductible en
application du présent paragraphe.
|
[10]
The
Applicant had a history of maximizing her contributions and there was no
evidence to suggest that she used the Limit intending to rely on subsequent
contribution room to eliminate the excess. Further, the fact that she made the First
Excess Contribution demonstrated that she did not intend to over-contribute
beyond the allowable amount (i.e. $2000.00). Because CRA decided to offer the
Applicant the opportunity to withdraw her over-contributions on a tax-free
basis pursuant to subsection 146(8.2) of the Act (the Earlier Decision), CRA
must have concluded in this case that the Applicant believed that the Limit had
been correct when she made the Second Excess Contribution.
THE
APPLICANT’S INCOME TAX RETURNS
[11]
The
Applicant did not file income tax returns for the 1997 to 2002 taxation years
until November 17, 2003. However, CRA acknowledges that taxpayers who do
not owe tax generally need not file returns unless CRA issues a demand under
subsection 150(2) of the Act. The Applicant was never sent such a demand.
Rather, she was sent a letter dated February 19, 1999 noting that she had not
filed a return for 1997 and requesting that she do so. That letter advised that
taxpayers “must file a tax return” in specific situations but none applied to
the Applicant. In particular, she did not owe any taxes.
[12]
The
Applicant responded to this and other requests to file a return by phoning CRA.
In many cases, she asked for extensions to file her income tax returns to which
CRA agreed.
[13]
On
November 17, 2003, in response to arbitrary assessments for taxation years 1999
and 2000, the Applicant filed income tax returns for the 1997 to 2002 taxation
years. No taxes were due and refunds were paid for all years.
PART X.1 TAX
[14]
Taxpayers
can be liable for Part X.1 Tax as long as an over-contribution remains in an
RRSP. Under subsection 204.1(2.1), that tax is calculated as 1% per month of
the cumulative excess amount. The cumulative excess amount, which is defined in
subsection 204.2(1.1), is the amount of the excess contributions less $2,000.00.
In the case of the Applicant, since she had made excess contributions of
$9,327.00, the cumulative excess amount on which she was assessed Part X.1 Tax
was $7,327.00.
[15]
A
taxpayer who has a cumulative excess amount must complete a T1-OVP Individual
Tax Return for RRSP Excess Contributions (T1-OVP) for each taxation year in
which the cumulative excess amount exists.
[16]
Penalties
and interest can accumulate on Part X.1 Tax if a taxpayer does not file T1-OVPs
on time and/or pay the Part X.1 Tax when due. To date, the Applicant has been
assessed and has paid $11,270.00 in Part X.1 Tax and associated penalties and
interest in respect of the First and Second Excess Contributions.
[17]
Under
subsection 204.1(4), the Minister of National Revenue (the Minister) may waive
the Part X.1 Tax if the over-contribution occurred because of a reasonable
error and if reasonable steps were taken to eliminate the excess. The
subsection provides:
|
(4)
Where an individual would, but for this subsection, be required to pay a tax
under subsection 204.1(1) or 204.1(2.1) in respect of a month and the
individual establishes to the satisfaction of the Minister that
(a) the excess amount or cumulative
excess amount on which the tax is based arose as a consequence of reasonable
error, and
(b) reasonable steps are being
taken to eliminate the excess,
the
Minister may waive the tax.
|
(4)
Le ministre peut renoncer à l’impôt dont un particulier serait, compte non
tenu du présent paragraphe, redevable pour un mois selon le paragraphe (1) ou
(2.1), si l’excédent ou l’excédent cumulatif qui est frappé de l’impôt fait
suite à une erreur acceptable et que les mesures indiquées pour éliminer
l’excédent ont été prises.
|
EARLIER
DECISIONS ON THE PART X.1 TAX
The
First Request
[18]
On
September 3, 2004, the Minister denied the Applicant’s first request for a
waiver of the Part X.1 Tax. It is unclear from the record when the Applicant
made this request.
[19]
The
decision letter stated:
Under Canada’s self-assessment system of taxation,
each individual is responsible for ensuring they do not contribute more to
their RRSP than is allowable, based on their deduction limit. This limit is
provided on the Notice of Assessment each year. It can also be obtained by
contacting Canada Customs and Revenue Agency.
…
The information presented in your
conversation has been taken carefully into consideration. I do sympathize with
your situation and I can appreciate that the excess contribution was not made
intentionally. However, you were provided with the information required to
contribute the correct amount to your RRSP. The fact that you were not
aware of the situation is not considered reasonable error.
[my emphasis]
[20]
However,
in an internal report on the Applicant’s situation prepared by
Michael Young on July 16, 2007 (the Young Report), CRA acknowledged
that:
This response may be cause for concern.
The Agency had originally provided an incorrect amount and (it appears) we
had never advised the taxpayer, in writing, that her revised 1997 RRSP
deduction limit was $794. We know that she was aware of the revised amount,
having reported it correctly when filing her 1997 return in November 2003. How
she actually got that amount, though, is unclear. It might have been
disclosed in conversations but at this time, there are no case notes to verify
this.
[my emphasis]
The
Second Request
[21]
An
administrative review of the previous decision was made September 20, 2005,
which upheld the earlier denial. That letter stated:
[Y]ou should have been aware that the
amount in Box 52 of your T4 slip is required
to be reported on your return. Under the self-assessment system of taxation, it
is every individual’s responsibility to ensure that their return is properly
completed.
I can assure you that careful
consideration has been given to your situation. However, I have to advise you
that there does not appear to be any circumstances that would warrant the
waiving of the Part X.1 tax.
[my emphasis]
[22]
However,
in the Young Report, CRA acknowledged that:
This statement is of concern because,
according to the copy of the 1996 return provided to us by the taxpayer, she did
report the correct amount in box
206.
Additionally, it needs to be noted that
the letter fails to advise the taxpayer that she had the right to make
application for judicial review under S. 18.1 of the Federal Court act if she
did not agree with the decision. (She would not be told that until May 2006.)
[emphasis in original]
The
Third Request
[23]
On
June 8, 2006, the Applicant met with an official from CRA and was advised that
the CRA would voluntarily conduct a third administrative review even though its
normal practice was to conduct only two such reviews. The third review was to
deal with interest and penalties (which are normally dealt with under the
fairness provisions of the Act) as well as relief from Part X.1 Tax.
[24]
The
Applicant formally requested the third administrative review in a letter dated
June 27, 2006. In her request, she wrote “[p]lease arrange for the third
review to be conducted in another tax services office that is within commuting
distance of my home address.” The previous reviews had both been conducted by
officials form the Toronto East Tax Services Office.
[25]
The
Applicant’s request was acknowledged by letter dated July 7, 2006, which stated
that “[y]our request will be addressed by the Toronto North Tax Services
Office. However, the review was actually conducted by the Toronto Centre Tax
Services Office and, as will be seen below, this prejudiced the Applicant
because there was a reasonable apprehension of bias on the part of the decision
maker in that office.
[26]
On
February 22, 2007, the Applicant made written submissions. She also asked to
meet “in person to clarify recurrent misconceptions, because of the complex
history of my case the substantial correspondence that has amassed over the
course of this lengthy dispute in my multiple attempts to resolve it.”
[27]
The
Applicant made further written submissions in a letter dated March 13, 2007.
[28]
The
Applicant met with CRA officials on April 18, 2007. CRA’s purpose at the
meeting was “in order to advise [the Applicant] of the [negative] decision.”
However, CRA agreed that the Applicant could submit further information.
[29]
The
Applicant submitted further information on May 27, 2007. CRA responded in a
letter dated May 31, 2007 which stated “[we] would ask that you allow until
June 29, 2007 for the information to be reviewed, at which time we will
contact you to arrange another meeting.” [my emphasis]
[30]
However,
no such meeting was held before the Decision was released on July 25,
2007.
[31]
CRA
says that is was unable to arrange the meeting due to scheduling conflicts
during the summer months. It also stated that:
The purpose of that further meeting was
to advise the Applicant personally of CRA’s decision and provide her with the
letter outlining the reasons for the CRA’s Decision. The intention of that
meeting was not to allow for further documentation as the Applicant had, by now,
had three opportunities to provide information and documentation to support her
claims (these were the letter dated February 23, 2007, the letter dated March
14, 2007 and her most recent letter dated May 27, 2007).
OTHER REVIEWS
[32]
It
is noteworthy that CRA also denied two requests made by the Applicant under the
fairness provisions of the Act.
THE DECISION
[33]
The
Decision on the third request took the form of a letter from Bruce Allen, the
Director of the Toronto Centre Tax Services Offices, to the Applicant dated
July 25, 2007. It was based on the Young Report which Bruce Allen approved
on July 24, 2007.
[34]
In
spite of the Earlier Decision described in paragraph 18, Supra, CRA
rejected the Applicant’s argument that the excess contributions had resulted
from reasonable error. CRA said:
The Agency accepts that it erred in
reporting an incorrect contribution limit for 1997; however it is our position
that it was not that error that solely created or contributed to the amount
owing. In conversations with Agency personnel, you have acknowledged that you
found the contribution limit amount curious in comparison to the previous
years’ smaller amounts, and even sought the opinion of co-workers and your
banker. It is regrettable that you chose to take their advice to maximize your
contribution without confirming the amount with the Agency. Despite having
questioned the amount, you chose to make the maximum contribution anyway, thus
taking it outside the realm of ‘reasonable error’.
[my
emphasis]
[35]
In
addition, CRA also held that the Applicant had not taken reasonable steps.
On August 11, 1997 you filed your income
tax return for the taxation year 1996. You did not file income tax returns
again until November 17, 2003, when you filed all outstanding returns. The
failure to file is, in itself, detrimental in that it allowed the error to go
undetected; however, the delay created by the failure to file is equally
detrimental in that penalties are calculated based on the duration of the
lateness and interest is charged on any outstanding balance from the due date
for payment until it is actually paid in full. We must conclude that had you
been compliant, filing income tax returns when required, the error would have
come to light much earlier, thus enabling you to take the reasonable steps
necessary to warrant consideration of a tax waiver, or, alternatively, to make
a compelling argument for the cancellation of penalties and interest.
…
Reasonable steps may include confirming
that an excess amount existed and, within a reasonable period of time,
reporting the excess by filing all required returns and applications. Your
decision not to file income tax returns by the required due dates, a lapse
spanning six years, contradicts any argument of reasonableness.
[my
emphasis]
[36]
For
the period prior to April 29, 2004, the Decision said, “I am reluctant to
concede that during this period, all of the Agency’s representatives you
communicated with were unable to provide the proper direction.” However, this
conclusion is contradicted by the Young Report which said “[i]t is highly
unlikely that a Non-Filer / Non-Registrant agent could or would give advice
relating to RRSP excess contributions”.
DISCUSSION
Whether the Error
was Reasonable
[37]
The
Act does not define ‘reasonable error’ and a review of case law did not lead me
to a helpful definition. However, CRA’s arguments are consistent with
interpreting ‘reasonable error’ as imposing the same requirements as a due
diligence defence.
[38]
The
Federal Court of Appeal in Corp. de l’École-Polytechnique v. Canada, 2004 FCA
127, 325 N.R. 64 has described the due diligence test as follows:
30 A person relying on a reasonable
mistake of fact must meet a twofold test: subjective and objective. It will not
be sufficient to say that a reasonable person would have made the same mistake
in the circumstances. The person must first establish that he or she was
mistaken as to the factual situation: that is the subjective test. Clearly, the
defence fails if there is no evidence that the person relying on it was in fact
misled and that this mistake led to the act committed. He or she must then
establish that the mistake was reasonable in the circumstances: that is the
objective test.
[39]
CRA
submits that the Applicant did not demonstrate due diligence. It says that the
Applicant was familiar with RRSP deduction limits and was suspicious about why
her limit would increase significantly without a clear reason. Under the
circumstances, CRA says that, in order to demonstrate due diligence, the
Applicant was obliged to contact CRA to confirm the Limit. Standing alone, this
conclusion might be reasonable. However, by making the Earlier Decision and allowing
the tax-free withdrawal under subsection 146(8.2), CRA had, in effect, already
conceded that the Applicant believed the Limit and made the Second Excess
Contribution relying on that mistaken belief. Because of the Earlier Decision it
was not reasonable for CRA to change its mind and later conclude that no
reasonable error existed.
[40]
Further,
CRA publications consistently affirmed the reasonableness of the Applicant’s
belief by saying that a taxpayer is entitled to rely on the RRSP deduction
limit contained in his or her notice of assessment. Guide T4040 RRSPs and Other
Registered Plans for Retirement (RRSP Guide) says:
How much can you deduct?
The amount of RRSP contributions you can
deduct [for the taxation year] is based on your … RRSP deduction limit, which
appears on your latest Notice of Assessment or Notice of Reassessment,
or on a T1028, Your RRSP Information for [year].
You can also deduct amounts for
contributions you make for certain income you transfer to your RRSP. The RRSP
deduction limit does not include these amounts.
[41]
As
well, even the Withdrawal Letter suggested that if the Applicant was…”unsure of
your current RRSP deduction limit, please refer to your most recent Notice of
Assessment.”
Whether
Reasonable Steps were Taken to Eliminate the Excess Contribution
[42]
The
CRA concluded that reasonable steps had not been taken primarily because the
Applicant was “not compliant [in] filing income taxes when required”. However,
as noted above and as CRA conceded at the hearing, the Applicant was not sent a
demand requiring her to file income tax returns. Therefore, she was compliant
with all her filing obligations and this aspect of the Decision is without a
factual foundation.
[43]
The
Applicant withdrew the entire Second Excess Contribution and $1,206.00 with
respect to the First Excess Contribution on March 30, 2005. She did not
withdraw the excess amounts promptly after she received the Withdrawal Letter
because she was concerned that she was being required to withdraw too much
money. CRA now agrees that her concern was valid and, in spite of several
telephone calls to CRA, her concern was never addressed. She also misread the
letter and thought she had until March 30, 2005 to make the withdrawals.
[44]
However,
contrary to the Applicant’s view, there was no indication in the Withdrawal
Letter about the timing of the withdrawal. As well, no sense of urgency was
conveyed. The Withdrawal Letter nowhere states that the Excess Contributions
should be withdrawn “immediately” or even “as soon as possible”. All it says is
that any excess “will remain subject to tax until the excess amount has been
withdrawn from your plan”.
[45]
In
view of its failure to suggest a proper time for the withdrawal or any urgency
in that regard and in view of the fact that the Applicant was being told to withdraw
an improper amount, it is not reasonable, in my view, for CRA to have concluded
that the Applicant did not take all reasonable steps to remove the over-contribution
because she did not make the withdrawal for eleven months.
[46]
In
the period from April 29, 2004 to March 30, 2005, the Applicant was
delinquent in that she failed to file her T1-OVP forms in a timely way. But
those forms dealt with the Part X.1 Tax and not with the withdrawal of over-contributions.
For this reason, her delay in filing those forms should not have had any negative
impact on the Decision. However, it does appear to have coloured CRA’s approach
to the Applicant’s request for Part X.1 Tax relief.
Whether Third
Review was Procedurally Fair
[47]
CRA
was obliged to conduct the third review in a procedurally fair manner. Information
Circular IC-07-1 which is entitled Taxpayer Relief Provisions provides at
paragraph 104 that:
CRA officials not involved
in the first administrative review and decision would carry out the second
administrative review. They would prepare a decision report for the director or
another delegated official for his or her consideration, including a
recommendation on whether or not granting relief is justified. The final
decision and notification of the decision to the taxpayer rests with the
director or another delegated official, such as an assistant director.
[my
emphasis]
[48]
CRA acknowledges that, although the Young
Report was prepared in the Toronto Centre Tax Services Office, Cynthia Cox, an
official from the Toronto East Tax Services Office who had been involved in the
earlier reviews, reviewed and agreed with the Young Report. This happened
despite the Applicant’s request and CRA’s assurances that the third
administrative review would be conducted by an office which had not been involved
in the earlier reviews.
[49]
Bruce
Allen likewise lacked complete independence. The Applicant says that, through a
request under subsection 12(1) of the Privacy Act, she obtained a
memorandum from Bruce Allen to Assistant Commissioner, Larry Hillier. Therein,
Bruce Allen provided an update on the Applicant’s file which, in my view, painted
such an inaccurate picture of the Applicant’s situation that it justifies a
finding of a reasonable apprehension of bias. While the memorandum is not
dated, the information it contained shows that it was prepared either before
the third administrative review commenced or early in that process.
[50]
The
memorandum stated, in part:
The taxpayer had a balance owing
resulting from assessments relating to RRSP over-contributions from 1996 to
2005.
[The excess contributions] had gone
unaddressed because the taxpayer stopped filing returns after [the 1996
taxation year], and did not file income tax returns again until 2003 and only
then after we had raised arbitrary assessments for certain years outstanding.
…
[I]n 1999, she had been given a time
period in which to withdraw the over-contribution so as to avoid it being
included in taxable income. She failed to do that.
…
[51]
These
paragraphs make it appear that the Applicant over-contributed to her RRSP ten
times. They also fail to mention that the Applicant never received a formal
demand and, therefore, was not obliged to file tax returns before the arbitrary
assessments were made. Lastly, there is no evidence in the Court record to
support the allegation that the Applicant failed to respond when she was given
time to withdraw the over-contribution.
[52]
In
addition, CRA told the Applicant that there would be a further meeting prior to
the Decision being made and it was not held.
[53]
These
failures breached the duty of procedural fairness owed to the Applicant.
CONCLUSIONS
[54]
The
Decision is unreasonable and the process behind it was unfair.
[55]
In
light of the long history of this file and the multiple errors in the Decision
and in the preceding reviews, I have concluded that this case is exceptional
and is one to which Wihksne v. Canada (Attorney General), 2002 FCA 356,
299 N.R. 211 applies. In that case, Justice Robert Décary of the Federal Court
of Appeal said (at paragraph 10) that “the interests of justice cry out for
directions putting an end to the process.” In my view, because the Applicant
did not know of the error in the Limit until April 29, 2004 and because
she was asked to withdraw incorrect amounts, an outcome favourable to the
Applicant on a further review is unavoidable. The Part X.1 Tax, with related
interest and penalties, would certainly be set aside.
[56]
Therefore,
in accordance with paragraph 18.1(3)(b) of the Federal Courts Act, I am
ordering that the Decision be quashed and that it be referred back to a
different Minister’s delegate of the Minister in the Toronto West Tax Services
Office for re-determination in accordance with the directions in my judgment.
JUDGMENT
UPON reviewing the
material filed and hearing the submissions of the Applicant and of counsel for
the Respondent in Toronto on Thursday, May 15, 2008;
AND UPON reviewing
post-hearing submission for the Respondent dated September 4, 2008
pursuant to the Court’s Direction of July 30, 2008;
AND UPON determining
that it was not necessary to receive submission from the Applicant in response
to the Respondent’s submissions of September 4, 2008;
NOW THEREFORE THIS COURT ORDERS AND ADJUDGES that, for the reasons given above, the
Application is allowed and the request for relief from Part X.1Tax is to be
re-determined by a different Minister’s delegate in the Toronto West Tax
Services Office. That delegate is hereby directed to conclude:
- That the First
Excess Contribution was a lawful over-contribution;
- That the Second
Excess Contribution was made as a result of reasonable error;
- That reasonable
steps were taken to eliminate the excess;
- That all Part X.1
Tax arising from the excess contributions and related interest and
penalties are to be reversed and the sum of $11,270.00 is to be repaid to
the Applicant forthwith.
“Sandra
J. Simpson”
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