Maarsman v. Canada (Customs and Revenue Agency), 2003 DTC 5677, 2003 FC 1234

Date: 20031022

Docket: T-659-02

Citation: 2003 FC 1234

Ottawa, Ontario, October 22, 2003

Present:    The Honourable Mr. Justice Blais           

BETWEEN:

                             MURIEL MAARSMAN

                                                                Applicant

                                   and

                   CANADA CUSTOMS AND REVENUE AGENCY

                                                               Respondent

                         REASONS FOR ORDER AND ORDER

[1]                 This is an application for judicial review of a decision made by Officer Blair Sixsmith of the Canada Customs and Revenue Agency [CCRA], on March 18, 2002, denying Muriel Maarsman's [the applicant] request to waive or cancel her assessed interest and penalties payable with respect to the 1987 taxation year, pursuant to subsection 220(3.1) of the Income Tax Act [the Act] as well as the Information Circular 92 -2 entitled Guidelines for the Cancellation and Waiver of Interest and Penalties [the Guidelines].

FACTS

[2]                 The facts of this matter have been gathered from both the applicant and her husband's affidavit evidence, as well as the parties memorandum of fact and law.

[3]                 The applicant is an individual resident of British Columbia.

[4]                 The bank of the applicant and her husband, Canadian Commercial, went bankrupt in 1984, which required the applicant and her husband to sell a transport company, Triangle Transportation Ltd., that they had been running for 24 years. They received $2 million in stock and a balance of $2 million on earn out shares, for a total of $4 million.

[5]                 In 1987, the financial collapse of the Vancouver stock market resulted in substantial financial loss for the applicant and her husband. By 1988, they had lost $2 million in stock. They gradually lost certain lands they owned, including a 28 unit townhouse complex in Chetwynd, B.C., and 160 acres of land. The only asset they retained was the principal residence that the applicant and her husband owned as joint tenants, which had been free and clear of all encumbrances until this point.

[6]                 In Mr. Maarsman's affidavit, it is alleged that the debts were his, and that they resulted in creditors commencing 15 separate legal proceedings against him. In order to finance the payment for the settlement of certain debts and legal proceedings, the applicant and Mr. Maarsman applied for and obtained a mortgage in the sum of $260,000.00 which was registered against their principal residence. The funds from the mortgage was applied to the settlement of several of Mr. Maarsman's debts.

[7]                 The applicant had authorized her husband to use her name when opening several securities accounts with brokerage firms. The applicant alleges that all funds used to open the securities accounts and to contribute to the said accounts, were solely from funds earned by Mr. Maarsman. She gave her husband an irrevocable power of attorney to buy and sell stock and other securities in the securities accounts. Mr. Maarsman did not inform the applicant of any transactions he arranged for the securities accounts, nor did the applicant have knowledge of any transactions with respect to those accounts. The applicant is alleged to have very limited knowledge and experience with securities investments.

[8]                 Prior to the end of 1990, the applicant had never been employed, nor earned any income on her own. All funds used for the maintenance of the applicant and her husband's household and their day to day living were earned solely by Mr. Maarsman. It is alleged by the applicant, and not contradicted by CCRA, that prior to 1990 the applicant had never filed an income tax return.

[9]                 Because of the massive losses suffered in 1987 and 1988, and the general disarray of Mr. Maarsman's affairs, the couple's accountant could not maintain the records and quit in 1989. A new bookkeeper was hired in 1993 and for two years, tried but could not reconstruct the records. The Maarsman's requested that the CCRA, which was then called Revenue Canada, audit their records, and when this did not happen, the bookkeeper quit. Revenue Canada advised the Maarsman's that an audit would only be completed if there was tax potential. They had however stated that there were losses.

[10]            Finally, after many requests from the couple, CCRA did the audit in 1995 for the years 1987 to 1992 [the audit years]. Personal income tax returns were then filed on Mr. Maarsman's behalf.

[11]            The 1995 audit assessed income to the applicant, that she alleges should have been attributed to Mr. Maarsman. This income was assessed on the basis of the purchase and sale of stock and other securities in the securities accounts.

[12]            The 1987 return was assessed to include a late filing penalty of $6,078.00 and interest of $53,424.00. However, there are no taxes owing in respect of that taxation year due to the application of a subsequent year's business loss carried back to eliminate income for 1987. Although the income was reduced, the interest and penalties were found to be still applicable, under subsections 161(1) and 161(7) of the Act.

[13]            On June 20, 1995, R. Dhillon of the Audit Division of the CCRA wrote a letter to the applicant with respect to her net business income (loss) for the audit years.

[14]            Under the statutory provisions commonly referred to as the Fairness legislation, a taxpayer may apply to the Minister of Finance [Minister] requesting that penalties or interest be waived or cancelled, pursuant to subsection 220(3.1) of the Act. Indeed, the Guidelines set out the process followed by the Minister in considering fairness requests.

[15]            On November 25, 1996, the applicant's representative, Jacqueline S. Guest, C.G.A., wrote a letter to the Minister and made a request under the fairness provisions for interest relief on behalf of her client.

[16]            On March 4, 1997, Badrudin Moosa, Technical Advisor at the CCRA, prepared a draft memorandum for discussion relating to the applicant's fairness request, to Len Worsfold, Manager of Verification and Enforcement Division, Burnaby - Fraser Tax Services Office.

[17]            On March 13, 1997, Mr. Worsfold wrote a letter to Ms. Guest and advised her that after consideration of her client's request for interest relief and a review of the applicable legislation, he concluded that it would not be appropriate to cancel the interest charges because it was determined that the applicant had the assets and the ability to pay the arrears. He however informed her of the possibility of initiating a second independent review of the decision.

[18]            On July 18, 1997, Ms. Guest wrote a letter to Mr. Worsfold requesting a further review of her client's situation. Mr. Worsfold then prepared summary notes relating to this second fairness request which he forwarded to the attention of the Fairness Committee, Collections Section, of the Burnaby - Fraser Tax Services Office.

[19]            On January 5, 1998, Ms. Guest wrote another letter to Mr. Worsfold and provided details of the applicant's family income and expenses. It is alleged by the CCRA that due to an administrative error (it misplaced the file), no written decision was issued in response to the second request.

[20]            On September 23, 1999, Ms. Guest wrote to J. Purda, who was then the Director of Taxation of the Burnaby - Fraser Tax Services Office, requesting a further review under the fairness legislation.

[21]            On April 9, 2002, Corinne Boivin, Acting/Section Manager of the Verification and Enforcement Division, reviewed all of the filed material and prepared a fairness decision report, recommending that the applicant's request be denied.

[22]            The file was forwarded to Mr. Sixsmith for a final decision. Since April 17, 2000, Mr. Sixsmith has held the position of Director of the Burnaby - Fraser Tax Services Office, and as such, is authorized, pursuant to subsection 220(2.01) of the Act, to exercise or perform the duties of the Minister with respect to subsection 220(3.1) of the Act.

[23]            Mr. Sixsmith reviewed the applicant's second request, the material in the CCRA file, including correspondence between the applicant and the CCRA officers described above, and the report and recommendation prepared by Ms. Boivin. He also interviewed Ms. Boivin and Narrin Gill, Assistant Director of the Verification and Enforcement Division, who were both signatories to the report.

[24]            On March 18, 2002, Mr. Sixsmith wrote a letter to the applicant, stating that:

My review reveals no indication that an error or delay on our part, or circumstances beyond your control, that would have affected your ability to file your return or to calculate amounts owing. As a result, we have concluded it would not be appropriate to cancel the interest on your account.

[25]            The latter decision is the subject of this application for judicial review.

APPLICANT'S SUBMISSIONS

[26]            The applicant submits that the debt remained unpaid because the Applicant had no way of paying it and that due to the attribution rules, it was not owed.

[27]            She further submits that prior to 1995, neither her nor her husband were aware that a problem existed, or that income tax was owing, because of their losses.

[28]            The applicant alleges that under the attribution rules, there is no tax payable by either party as the income in question would go against Mr. Maarsman's loss, to offset the gain from the applicant.

[29]            The applicant argues that under the fairness legislation, because she had no knowledge of the taxes owed until 1995, no interest should be due. The applicant further argues that R. Dhillon should have noticed that in 1988, she had a loss of $460,175.00, which she finally wrote off against her 1987 gain of $89,440.00, which should have been done at that time.

[30]            The applicant submits that the fact that the CCRA took up to two years to answer her first fairness request and a further three years to answer her second fairness request, all the while allowing interest to continue to accrue, was unreasonable.

Order Sought

[31]            The applicant seeks to have all penalties and interest cancelled as due to the attribution rules, the fairness rules, and the ability to pay rules, which are all applicable in the present case, with costs.

RESPONDENT'S SUBMISSIONS

[32]            The respondent submits that in exercising his discretion under subsection 220(3.1) of the Act, the Minister has a duty to act fairly in making decisions, as his powers are derived from statute and must be exercised according to the rules of procedural fairness. The respondent further submits that no specific rule of procedural fairness are set out in the Act with respect to applications for relief, pursuant to subsection 220(3.1) of the Act.

[33]            The respondent argues that Parliament has given the Minister a great deal of latitude in making decisions under the fairness legislation, including whether to waive or cancel penalties or interest, pursuant to subsection 220(3.1) of the Act. It is clear, according to the respondent, that the only reason for this Court to interfere with the Minister's decision would be if it contravened paragraphs (a) to (f) of subsection 18.1(4) of the Federal Court Act.

[34]            The respondent submits that in exercising his broad discretionary powers pursuant to subsection 220(3.1) of the Act, the Minister may formulate general policy guidelines. Such guidelines have been set out in several publications for use by the CCRA and for the guidance for the public in making requests to waive or cancel penalties or interest. The Guidelines set forth the relevant criteria and explain the administrative process that will be followed by the Minister.

[35]            As the Act and the Income Tax Regulations are silent as to what criteria should be considered, the respondent submits that there is only a requirement that the criteria are relevant factors and are applied in good faith. The discretion conferred on the Minister is not limited by statute.

[36]            The respondent further submits that it is quite proper for the Minister to decide that the authority to waive or cancel penalties or interest should only be exercised in exceptional or extraordinary circumstances.

[37]            The respondent alleges that as the statutory discretion under subsection 220(3.1) of the Act was conferred by Parliament on the Minister, and then delegated to certain officials of the CCRA, this Court should not substitute its views of the decision-maker. The Court's function is to review the manner in which the decision was made. The role of the Court in such cases is a supervisory one designed to prevent the abuse of statutory discretion.

[38]            The respondent submits that the applicable standard of review in the present case is that of patently unreasonable.

[39]            The respondent alleges that the Minister's delegates exercised their discretion under subsection 220(3.1.) of the Act in a fair and reasonable manner. They based their decisions not to waive or cancel interest on relevant factors which they applied in good faith. Those factors were:

1)        the nature of the requests made by the applicant;

2)        the information provided to the applicant by the Minister;

3)        the guidelines published by the CCRA;

4)        the submissions made by the applicant;

5)        the correspondence on file; and

6)        the lack of extraordinary circumstances which might support the applicant's request for relief.

[40]            The respondent finally submits that if this Court finds that the discretion was not exercised in an equitable manner, the only remedy available to the applicant would be a referral back to the Minister with a direction that the discretion under subsection 220(3.1) of the Act be exercised fairly and in accordance with the principles of natural justice. The Court has no authority to exercise this statutory discretion to order that penalties or interest be waived or cancelled or to order that the Minister reach such a conclusion.

ISSUE

[41]            Did the Minister properly exercise his discretion, pursuant to subsection 220(3.1) of the Act, in deciding not to waive or cancel interest assessed to the applicant with respect to the 1987 taxation year?

RELEVANT LEGISLATION

[42]            Subsection 220(1) of the Act refers to the Minister's duty:

[43]            Subsection 220(2.01) of the Act is related to the possible delegation of powers or duties:

[44]            Subsection 220(3.1) refers to the waiver of penalty or interest:

[45]            The Guidelines provide examples of circumstances beyond a taxpayer's control:

[46]            Section 10 of the IC 92-2 refers to the factors considered when determining whether or not to cancel or waive interest or penalties:

[47]            Section 161 provides, in part:

ANALYSIS

Standard of Review

[48]            It is trite law that in a judicial review of a discretionary decision, the Court must show utmost deference. The principle can be found in [1982] 2 S.C.R. 2">Re Maple Lodge Farms Ltd. and Government of Canada et al., [1982] 2 S.C.R. 2; 44 N.R. 354; 137 D.L.R. (3d) 558 (S.C.C.), where McIntyre, J. stated at p. 562:

It is, as well, a clearly-established rule that courts should not interfere with the exercise of a discretion by a statutory authority merely because the court might have exercised the discretion in a different manner had it been charged with that responsibility. Where the statutory discretion has been exercised in good faith and, where required, in accordance with the principles of natural justice, and where reliance has not been placed upon considerations irrelevant or extraneous to the statutory purpose, the courts should not interfere.

[49]            In a case such as the one at bar, dealing with the judicial review of the Ministerial decision under subsection 220 (3.1), the standard of review is patent unreasonableness, as this Court has often reiterated (Metro-Can Construction v. Canada, 2002 FCT 1171, Heeg v. Canada (Attorney-General), 2003 FCT 337, Brickenden v. Canada (Customs and Revenue Agency), 2003 FCT 929, Edwards v. Canada (Customs and Revenue Agency), 2002 FCT 618).

[50]            However, the fairness provisions exist to allow the taxpayer to be treated with common sense. It has often been said that there is no room for equity in taxing statutes. But Parliament has chosen to enact the fairness provisions, and the Minister has a duty to ensure that they are applied fairly to the taxpayer. The standard of patent unreasonableness is tempered by the following quote from Justice Rouleau analyzing the scope of review of subsection 220(3.1) in Kaiser v. M.N.R. (1995), 95 D.T.C. 5187 at pages 5188-5189, where he states:

The purpose of this legislative provision is to allow Revenue Canada, Taxation, to administer the tax system more fairly, by allowing for the application of common sense in dealing with taxpayers who, because of personal misfortune or circumstances beyond their control, are unable to meet deadlines or comply with rules under the tax system. The language used in the section bestows a wide discretion on the Minister to waive or cancel interest at any time. To assist in the exercise of that discretion, policy guidelines have been formulated and are set out in Information Circular 92-2.

(...)

Every case is required to be decided on its own merit in order that circumstances unique to that individual taxpayer are taken into account ... [W]hen the Minister exercises his discretion under subsection 220(3.1), he is required to take into account considerations relevant and unique to that taxpayer alone.

Decisions under the fairness provisions

[51]            The applicant's representative, Jacqueline Guest, made a first level request for interest relief to the Minister on November 25, 1996. In this letter, Ms. Guest simply stated that since the carryover of losses from 1988 to 1987 completely eliminated the income tax owing, the interest, which had compounded from 1987 to 1995, the year that the applicant had been informed of the income tax owing, should be waived. This application was denied; given the information that had been provided in this first request, the exercise of discretion would not have been interfered with, had a judicial review been applied for then.

[52]            The exercise of discretion is more problematic in the second level fairness review. By this time, CCRA is apprised of the applicant's situation, and still, the Minister refuses to exercise his discretion to waive the interest accumulated.

[53]            I will summarize at this point the facts as I find them.

[54]            In 1987, the applicant had never filed an income tax return. The assets which she owned with her husband were entirely administered by him, and he declared in his own name all income generated by these assets.

[55]            In 1987 and 1988, the couple suffered heavy financial losses subsequent to the 1987 stock market crash. Mr. Maarsman did not file tax returns for those years, thinking that the losses meant that since he did not owe Revenue Canada taxes, he did not need to file an income tax return. Mr. Maarsman was wrong, and this situation was subsequently rectified. Mr. Maarsman filed the missing income tax returns, and paid the penalty attached to not filing in time. However, no tax was assessed to him for 1987 and 1988, because of the losses.

[56]            An audit occurred in 1995 because Mr. Maarsman had repeatedly asked Revenue Canada for help in straightening out his financial affairs. For some reason, Revenue Canada chose to assess the applicant for 1987 and subsequent years, and found that she had an undeclared taxable income of $89 440 for 1987.

[57]            By 1995, when the applicant was informed that she had been assessed for 1987, the original $35 000 income tax had grown, with interest, to some $53 000. The interest alone (the tax itself was deducted in 1996, see below) now stands at over $105 000.

[58]            The letter sent to the applicant on June 20, 1995, shows the Net Business Income and Loss for the years 1987-1992. It is obvious that the 1988 losses ($460,175) can be carried back to cover the 1987 income.

[59]            The applicant argues that she could not have known in 1987 that income tax was owing; she assumed that all income tax was paid by her husband.

[60]            The absurdity of this situation is that there are no taxes owing for 1987, because of the 1988 losses. Although the 1988 return was filed only in 1996, Revenue Canada knew, as soon as it did the audit, that the losses had been incurred.

[61]            CCRA argues that the case falls squarely within subsections 161(1) and (7), which provide that even where the tax has been cancelled by a subsequent year carryback, the taxpayer still owes the interest due for the taxable year.

[62]            CCRA further argues that this Court has no jurisdiction to question assessments, which are the jurisdiction of the Tax Court. I do not dispute that statement, but in order for this Court to determine whether the Minister has exercised his discretion fairly, it is necessary to understand the starting point of the astronomical interest now being charged to the taxpayer.

[63]            The question I must answer is whether the Minister has properly considered the relevant evidence and whether, in the words of Justice Rouleau he has "take[n] into account considerations relevant and unique to that taxpayer alone".

[64]            CCRA has chosen to apply strictly subsections 161(1) and 167(7). Reading the second fairness decision, it seems that Mr. Sixsmith, based on the report provided by Ms. Boivin, has considered all the information supplied and found that the applicant does not qualify under the Guidelines in Circular 92-2 for the exercise of the discretion of the Minister to waive the interest owed. I reproduce below those parts of the Guidelines which appear to me to apply to the applicant's case:

[65]            Section 5 of the Guidelines:

Penalties and interest may be waived or cancelled in whole or in part where they result in circumstances beyond a taxpayer's (...) control.

section 6:

Cancelling or waiving interest or penalties may also be appropriate if the interest or penalty arose primarily because of actions of the Department, such as:

(...)

(e) delays in providing information such as the case where the taxpayer could not make the appropriate instalment or arrear payments because the necessary information was not available.

and especially, section 10:

The following factors will be considered when determining whether or not the Department will cancel or waive interest or penalties: (...)

(b) whether or not the taxpayer has knowingly allowed a balance to exist upon which interest arrears has accrued; (...)

[66]            CCRA seems to believe that in 1987, the applicant was aware of her duties to file a return and pay income tax. This is not what I gather from the evidence. In the Fairness Decision Report by Ms. Corinne Boivin dated April 9, 2002, (the basis for the impugned decision), Ms. Boivin quotes from a letter received from the Maarsman's, which is undated but included with a letter from Jacqueline Guest dated July 18, 1997, where the writer of the handwritten, unsigned letter writes: "Prior to this problem Income Tax on all my former companys [sic] & myself have been in good order". Ms. Boivin assumes the letter was written by Mrs. Maarsman, and that it shows that the applicant was aware of her obligation to file an income tax return.

[67]            Except that it is more probable that Mr. Maarsman wrote that letter. The handwriting does not vary, and at page 3 of the letter, the author writes:

(...) The lady at Revenue Canada to have [sic] my wife call & she would nil balance her tax. My wife did not understand that there was no problem so she went to my sons acct to try & understand why the losses were so large so by the time his acct got involved the lady at income tax finally closed the file & problem started on int & penalty.

[68]            I cannot conclude that in 1987 Mrs. Maarsman was aware of her tax liabilities. For this reason, I believe that the decision was made without full consideration of all the relevant factors, and is reviewable on that basis.

[69]            In addition, there have been considerable delays dealing with the second fairness request. CCRA admitted that the file had been misplaced for a while. Actually, it took almost five years from the request for the second level fairness procedure, on July 18, 1997 to a decision being made by Mr. Sixsmith on March 18, 2002.

[70]            CCRA argues that this does not change anything in terms of the money owed by the applicant, of which she has been aware since 1995. Perhaps not, by a strict interpretation of the Guidelines, which provide that processing delays can be a consideration where they cause the taxpayer not to be informed of the amount owing.

[71]            But in this case, the five-year delay adds yet more accrual of interest, compounding a situation in which the applicant found herself through no fault of her own. Surely the Guidelines are not meant to be interpreted strictly so as to harm the taxpayer, if they are to carry out "fairness provisions". As a matter of fact, the introduction to Circular IC-92-2 states:   

3. These are only guidelines. They are not intended to be exhaustive, and are not meant to restrict the spirit or intent of the legislation. (...)

[emphasis added]

[72]            At the hearing, CCRA's counsel suggested that perhaps this application was not the proper recourse for the applicant. I'm not certain I have understood what she meant by the "proper recourse".

[73]            Perhaps, from the start, the applicant should have objected to the assessment. However, the applicant alleges she never received a notice of assessment. Counsel for CCRA assures me that a notice of assessment was sent out. CCRA no longer has a copy of that notice, so I have not seen it, and it would be difficult at this point for the applicant to challenge a non-existent notice of assessment.

[74]            I believe that the applicant has been a victim of circumstances, and that through no fault of her own, she did not know that she owed income tax in 1987. That tax has since been cancelled, and only the interest carries on, cut from its moorings, but casting a very long shadow on her life.

[75]            I do not think that in making his decision the Minister's delegate, Mr. Sixsmith, truly considered the particular circumstances of this case.

[76]            I would send back the case to CCRA for new decision based on these reasons.

                                                                            ORDER

THIS COURT ORDERS THAT:

-          This application for judicial review is allowed;

-            The case is sent back to CCRA for a new decision by a different officer based on these reasons;

-            With costs in favour of the applicant.

                    Pierre Blais                     

    J.F.C.

                                                    FEDERAL COURT OF CANADA

                                                                 TRIAL DIVISION

                              NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:                                             T-659-02

STYLE OF CAUSE:                           Muriel Maarsman v. Canada Customs and Revenue

Agency

PLACE OF HEARING:                     Vancouver and Ottawa

DATE OF HEARING:                       May 20, 2003, June 9, 2003 and continued on October 6, 2003

REASONS FOR ORDER AND ORDER :    BLAIS, J

DATED:                                                October 22, 2003

APPEARANCES:

Mr. Daniel Maarsman                                                                     APPLICANT on her own behalf

Ms. Muriel Maarsman

Ms. Karen A. Truscott                                                                  FOR RESPONDENT

SOLICITORS OF RECORD:

Mr. Daniel Maarsman                                                                     APPLICANT on her own behalf

Ms. Muriel Maarsman

Mr. Morris Rosenberg                                                                  FOR RESPONDENT

Deputy Attorney General of Canada