Citation: 2010 TCC 246
Date: 20100505
Dockets: 2009-1297(IT)G
2009-1299(GST)G
BETWEEN:
TERRY E. TAYLOR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] These are applications for determination
of a question pursuant to section 173 of the Income Tax Act and section
310 of the Excise Tax Act.
[2] The
question to be determined, as framed by the parties in each of the
applications, is:
Whether the Settlement Agreement dated January 22, 2009 is
valid and binding on the parties so as to prevent the Appellant from appealing
the reassessments to this Court.
[3] The assessments to which the reference
relates are:
a)
assessments made under
the Excise Tax Act (1) by notices dated November 28, 2006 for the
period from January 1, 2000 to December 31, 2001, and (2) by notice dated May
8, 2008 for the period from October 1, 2006 to December 31, 2006; and
b)
assessments made under
the Income Tax Act (1)
by notices dated May 7, 2009 for the 2000, 2001, 2002 and 2003 taxation years,
and (2) by notice dated July 31, 2006 for the 2005 taxation year.
[4] The
appellant, Mr. Terry Taylor, submits that the settlement agreement is invalid
given the circumstances under which it was made.
[5] The
purported agreement was signed at a settlement meeting held during the
objections process. The agreement is reflected in two documents: a settlement
offer signed by the appeals officer and a waiver signed by Mr. Taylor.
[6] The
essential elements of the settlement were that gross negligence penalties under
the Income Tax Act were to be vacated and the appellant’s right to
object or appeal was waived in accordance with subsections 165(1.2) and
169(2.2) of the Income Tax Act and subsections 301(1.6) and 306.1(2) of
the Excise Tax Act.
[7] These legislative provisions are
reproduced below.
Income Tax Act
165(1.2)
Notwithstanding subsections (1) and (1.1), no objection may be made by a
taxpayer to an assessment made under subsection 118.1(11), 152(4.2), 169(3) or
220(3.1) nor, for greater certainty, in respect of an issue for which the right
of objection has been waived in writing by the taxpayer.
169(2.2)
Notwithstanding subsections (1) and (2), for greater certainty a taxpayer may
not appeal to the Tax Court of Canada to have an assessment under this Part
vacated or varied in respect of an issue for which the right of objection or
appeal has been waived in writing by the taxpayer.
Excise Tax
Act
301(1.6) Notwithstanding subsection (1.1),
no objection may be made by a person in respect of an issue for which the right
of objection has been waived in writing by the person.
306.1(2)
Notwithstanding sections 302 and 306, a person may not appeal to the Tax Court
to have an assessment vacated or varied in respect of an issue for which the
right of objection or appeal has been waived in writing by the person.
[8] It is
useful to have some understanding of the tax issues that were under objection.
For this purpose, I have reproduced
below a summary of the issues as set out in the appellant’s pre-hearing brief.
a)
Mr. Taylor’s employment relationship with the MacDonnell Group Limited
(MGL)
b)
Mr. Taylor’s employment relationship with Advanced Metal Technology
Limited
c)
Treatment of certain credit card advances while Mr. Taylor was with MGL
d)
Treatment of business investment losses relating to 1702182 Canada Ltd.
(“Canway”)
e)
Treatment of business investment losses relating to Service World Inc.
f)
The assessment of gross negligence penalties by the CRA
g)
The deduction of employment expenses by Mr. Taylor
h)
The deduction of legal fees incurred by Mr. Taylor
i)
The correct amounts of HST payable by Mr. Taylor relating to January 1,
2000-December 31, 2001, and October 1-December 31, 2006.
Background
facts
[9] At the hearing, testimonial evidence was
given by the four individuals who attended the settlement meeting: (1) Mr.
Taylor, (2) Mrs. Anne Marie Long, the regional chief of appeals, (3) Mr. Richard
AuCoin, the appeals team leader, and (4) Mr. Loren Itterman, the appeals
officer. The documentary evidence included the notes of Mr. Itterman taken
during the objection process, and the notes of Mrs. Long taken during the settlement
meeting.
[10] Mr. Taylor lives in Lower Sackville, Nova Scotia. He has a professional designation of certified general
accountant and has significant business experience in finance and
administration.
[11] On May 5, 2005, officials from the RCMP
and the Canada Revenue Agency conducted a search and seizure at Mr. Taylor’s
residence in connection with suspected offences under the Income Tax Act.
[12] The warrant that authorized the search was
subsequently quashed on the basis that the information provided to support the
warrant was in error and had not been adequately verified. It was also
determined that the conduct of the investigating officer was egregious and
oppressive: R. v. Taylor, 2006 NSSC 280; 2007 NSSC 56; 2008 NSCA 5.
[13] No criminal
charges were laid, and assessments
were subsequently issued without an audit.
[14] Mr. Taylor prepared a notice of objection
to the assessments which was approximately 100 pages in length. It was filed in
December 2006. Legal counsel, Mr. Gerard Tompkins, was retained a few months
later in connection with the objection process.
[15] The following paragraphs describe some of
the key events in the objection process as far as the evidence reveals. It is
not intended to be exhaustive.
[16] Mr. Itterman was the appeals officer who was
assigned the file. He began his review of the notice of objection around June
2007 and had several communications with Mr. Tompkins over the next few months.
[17] These communications culminated in a
meeting on August 22, 2007 between Mr. Itterman and Mr. Tompkins. At the end of
the meeting, Mr. Tompkins undertook to work towards obtaining further
supporting documentation. It was understood that September 30, 2007 would be the
final deadline for submitting information.
[18] Just
before the September 30 deadline, another meeting was held. This time both Mr.
Taylor and Mr. Tompkins met
with Mr. Itterman. The date for receiving supporting information was extended
to October 4, 2007.
[19] On September 30, 2007, Mr. Taylor sent a
14 page letter addressed to the regional director of the CRA, Mr. Donald Gibson.
In general, the letter alleged that the objection process was not being
properly conducted by the CRA. Persons inside and outside the CRA were listed
as being copied on the letter, including Members of Parliament and the Auditor
General of Canada.
[20] Mr. Itterman responded to the letter on
October 17, 2007. He stated that, after discussing the matter with Mr. Gibson,
it was decided that Mr. Itterman would document the CRA’s position and Mr.
Taylor would be given 30 days to respond. Mr. Itterman sent a detailed letter
on October 22, 2007 and Mr. Taylor responded within the 30 days.
[21] In
addition to this correspondence, on November 19, 2007 Mr. Taylor sent a letter addressed to Mr. Gibson,
Mr. Itterman, and Mr. AuCoin. A number of high level officials were shown being
copied on the letter, including the offices of the Prime Minister of Canada and
the Premier of Nova Scotia.
[22] The general import of the letter is
reflected in the following excerpt:
The CRA will be held accountable to the public and the CRA
will be made to pay for their abuse and negligence. Unless a proper audit is
performed, or the Appeals Division simply accepts my appeal, I will guaranty
the CRA that they will be in the news headlines and be made to pay for their
negligence and damages! The CRA will look bad and will be made to pay for their
abuse, mistakes, errors, omissions, and negligence. I will also ensure that
individuals involved in these CRA negligent decisions are made accountable.
[23] The Minister of National Revenue followed up
on this complaint and a reply was sent by his office on March 14, 2008. The
reply was not entered into evidence.
[24] Meanwhile,
Mr. Itterman continued his
review of the objection for several months and attempted to obtain further
information from various sources. It appears that the review was complete
around August, 2008 and a meeting with Mr. Taylor was scheduled in order to
communicate the results.
[25] Mr. Tompkins was informed of the upcoming
meeting by Mr. AuCoin, the team leader, during a conversation they had about
another file. Mr. Tompkins indicated that he did not want to attend the meeting
because he did not want to be called as a witness in the event that the matter
went to court.
[26] The meeting took place on October 7, 2008,
with Mr. Taylor, Mr. Itterman and Mr. AuCoin in attendance. Near the end of the
meeting, Mr. Taylor broached the subject of a possible settlement. It was
agreed that the CRA would provide Mr. Taylor with a breakdown of the amounts at
issue to assist him in evaluating a possible settlement and that Mr. Taylor
would provide a settlement offer within 10 days after that. The breakdown was
sent by Mr. Itterman the following day.
[27] Extensions of the 10-day deadline were
subsequently granted as Mr. Tompkins became involved in this process. The final
extension was communicated by a voice mail from Mr. Itterman to Mr. Tompkins. A
transcription of the voice mail was entered into evidence (Ex. A-1), and an
excerpt is reproduced below.
Sorry it took me so long to get back to you, but I ended up
having to meet with the Chief of Appeals, Anne Marie Long, and Richard AuCoin,
my supervisor, and they’ve agreed to allow the extension to December 19th,
but they’ve asked that the offer be a serious settlement offer.
[28] A
response was sent by the December 19, 2008 deadline by way of a letter from Mr. Tompkins.
[29] Mr.
Tompkin’s letter was the last straw for Mrs. Long, the chief of appeals,
because it failed to make a serious settlement offer.
[30] Mrs. Long concluded that the objection
process was being abused. It had gone on for a long time without Mr. Taylor
bringing forward much to support his position. On the other hand, she thought
that Mr. Itterman had done a significant amount of work. Her conclusion was that
it was appropriate to close the file.
[31] When Mr. Taylor was informed of this on
January 20, 2009, he immediately sent several communications to the CRA in an attempt
to keep the file open. He asked for a meeting with Mr. Itterman and Mr. AuCoin
and another meeting with Mrs. Long. He wrote: “Let’s finish this final
negotiation process and settle as we have agreed.” Some of the communications
contained the following: “Please respond directly to me and no one else.”
[32] The CRA agreed
to a meeting and it took place
on the morning of January 22, 2009. Mr. Taylor attended without legal counsel. Mrs.
Long, Mr. AuCoin and Mr. Itterman represented the CRA.
[33] Mrs. Long
led the meeting for the CRA. She indicated that the file was about to be closed
but invited Mr. Taylor to make an offer. Mr. Taylor raised several points for negotiation, but did not make
much headway.
[34] When Mr. Taylor raised the possibility of
settling on the basis of waiving penalties and interest, he was informed that
there was a separate process for the waiver of interest but that the CRA would
be prepared to vacate penalties if Mr. Taylor waived his right to object or
appeal. Mr. Taylor agreed to this.
[35] Mr. Itterman was then instructed to draft
settlement documents reflecting this agreement. He left the meeting for a short
while to do this and Mrs. Long also left the meeting at this time. When Mr.
Itterman returned, the documents were briefly explained by the CRA officials
and then they were signed. The meeting was then over, having lasted somewhere
between two and three hours.
[36] Four days after the meeting, on January
26, 2009, Mr. Taylor communicated to the CRA that the settlement was not valid
or enforceable because he was under extreme duress at the meeting and he had
not been able to obtain legal advice.
[37] The CRA took the position that the
settlement was valid. Mr. Taylor subsequently tried to have the file re-opened
but without success.
[38] Assessments
were subsequently issued and appeals
were then instituted in this Court. This reference was brought before the
respondent filed replies.
Legal
principles referred to
[39] I was referred to several decisions of this Court that
had considered waivers of this nature: Pearce v. The Queen, 2005 TCC 38;
Nguyen v. The Queen, 2005 TCC 697, 2008 DTC 2880; McGonagle v. The
Queen, 2009 TCC 168; 2009 DTC 1120; and Bauer v. The Queen, Court
file no. 2007-4421(IT)G (oral decision delivered on September 9, 2009). In all
of the cases, the waivers were determined to be valid.
[40] Recently, the Tax
Court decision in McGonagle was confirmed on appeal (2010 FCA 108).
[41] In Nguyen, Justice Dussault described the
principle to be applied as follows, at paragraph 33:
It is clear to
me that a waiver of the right to object and appeal signed by a taxpayer cannot
be set aside except on a preponderance of evidence that the taxpayer did not
freely consent to the waiver or was unduly pressured.
[42] Counsel for the appellant also suggested that assistance
could be obtained from court cases dealing with consents in matrimonial and
employment contexts. As no specific judicial decisions were referred to, written
submissions were received at my request subsequent to the hearing.
[43] In the employment context, reference was made to Farmer
v. Foxridge Homes Ltd., [1992] AJ No. 1040 (Alta QB); [1994] AJ No. 177
(Alta CA). In that case, an employee had agreed to a settlement with his
employer shortly after being summarily dismissed. The court found that the
settlement was invalid, noting that the employee had no notice, and no
opportunity to prepare or to consult legal counsel.
[44] In response, counsel for the respondent referred to a
judicial decision in which a settlement with a dismissed employee was found to
be valid notwithstanding that the employee was only given a very short time to
consider it: Sapieha v. Intercontinental Packers Ltd., [1985] SJ No. 66,
10 CCEL 87 (Sask QB).
[45] As for matrimonial law, counsel for the appellant
referred to an excerpt from Miglin v. Miglin, [2003] 1 S.C.R. 303, at para.
83:
[…] the court
should be loathe to interfere. In contrast, where the power imbalance did
vitiate the bargaining process, the agreement should not be read as expressing
the parties’ notion of equitable sharing in their circumstances and the
agreement will merit little weight.
[46] The principle described in Miglin is useful to
consider. However, it should be borne in mind that, in the matrimonial context,
Parliament has intervened to specifically give courts the right to override settlement
agreements.
[47] Counsel for the appellant also referred to the
principle of unconscionable bargains. In Klassen v. Klassen, 2001 BCCA
445, the principle was described as having the following two elements: (1)
proof of inequality in the position of the parties arising out of ignorance,
need or distress of the weaker, which left him in the power of the stronger,
and (2) proof that the purchase was made from the ignorant party at a
considerable undervalue (para. 59).
Analysis
[48] To a great
extent, the appellant’s case depends on his own testimony.
[49] Below are
some examples of Mr. Taylor’s testimony based on a transcript of the
proceedings.
·
Mr. Taylor
stated that, when he learned on January 20, 2009 that the file was to be closed,
it tore him apart, devastated him, and he was totally lost (Transcript, p. 19,
20).
·
Mr. Taylor
stated that he became totally lost at the meeting and felt at the CRA’s mercy when
he was informed that the amount at issue was $261,000 (Transcript, p. 28).
·
Mr. Taylor
testified that he was “scared to death” when Mrs. Long informed him that it
would come out in court that he had embezzled funds and that he would have to
pay the consequences (Transcript, p. 30).
·
Mr. Taylor
testified that Mrs. Long refused to give him more time. He stated (Transcript,
p. 31):
What happened was I was forced into a corner. I had
no where to go. I had no where to go that day. I specifically asked for two to
three weeks for time to take all of this back to my attorney, Gerard Tompkins,
so we could go through this at this point. And, you know, make an offer, which
is what I tried to do. I tried to get this back on the table and [Mrs. Long]
said, we’re not giving any more time. It has to be done this day before you
leave this office. It was said to me once, it was said to me twice, it was said
to me three times. So I had to make a multi hundred thousand dollar decision
right there.
·
Mr. Taylor also
suggested that he did not fully understand the ramifications of the settlement.
For example, he described a schedule that was presented at the meeting
(Transcript, p. 45):
I remember seeing a spreadsheet with a bunch of
numbers on it. But I mean did I – did I have time to review them or take them
to another accountant to understand them, no.
·
Upon being
presented with the settlement letter, Mr. Taylor felt that he had no option but
to sign (Transcript, p. 35):
[…] in my mind, I was so convinced by Anne Marie
Long that no matter how smart we think we are or how sophisticated we can be,
at the end of the day you’re human and when you’re being tackled by three
people and forced in the corner, I felt I had to sign that. I had no options.
[50] The above
testimony, which is self-interested, does not ring true when considered in
light of the evidence as a whole. It is just not believable that Mr. Taylor
felt “lost” or “devastated” at the settlement meeting.
[51] Mr.
Taylor stated that he felt totally lost when he found out that the amount
payable was $261,000. He also testified that he did not fully understand the
spreadsheet presented at the meeting.
[52] This
testimony defies common sense. Mr. Taylor was an experienced businessman with a
financial background. He was also very knowledgeable about the tax issues under
dispute and he had been aware of the amounts at issue, including the penalties,
for some time. The spreadsheet that was presented at the meeting had previously
been provided to Mr. Taylor at his request. It was not difficult to understand.
[53] Mr.
Taylor stated that he was scared to death when informed that he would have to
pay the consequences of embezzlement.
[54] This also
does not make sense. Several months earlier, Mr. Taylor had been given detailed
information regarding the CRA’s position. It would not be a surprise to Mr. Taylor
that the alleged embezzlement would be part of the evidence if the matter went
to court.
[55] Further,
Mr. Taylor’s testimony is at odds with the testimony of the three CRA witnesses.
According to their testimony, the settlement meeting was cordial and Mr. Taylor
was calm. Upon being informed that the CRA was about to close the file, Mr.
Taylor indicated that he wanted the matter over with as well. Mr. Taylor
immediately accepted the settlement when it was offered, and he did not ask for
more time to consider it.
[56] I accept
this version of events.
[57] The
testimony of Mr. Itterman and Mr. AuCoin in particular appeared to be
forthright and unbiased. Both gentlemen had a fairly good recollection of what transpired
at the meeting, which is not surprising given the acrimonious history of the
file.
[58] As for
Mrs. Long’s testimony, it also seemed to be generally reliable. There were a
few occasions in which her testimony seemed to be partisan, but for the most
part I found her to be a credible witness. Her testimony was generally
corroborated by Mr. Itterman and Mr. AuCoin.
[59] It
remains to be considered whether the settlement agreement is invalid
considering the evidence as a whole. Was the agreement freely made? Was Mr.
Taylor unduly pressured?
[60] First, I
conclude that the agreement was freely made. Mr. Taylor understood what he was
agreeing to, and he had ample opportunity to consider his options and consult
with his lawyer prior to the meeting. The circumstances are far different from
those considered in Farmer, the employee dismissal case referred to by
counsel for the appellant.
[61] I also
find that Mr. Taylor was not unduly pressured into making the settlement. Pressure
was exerted, but it was not undue.
[62] The
context of the settlement meeting is important. The meeting took place at the
request of Mr. Taylor as a last ditch effort after the CRA had concluded, with what
appears to be good reason, that the file should be closed. The appeals division
had previously conducted an extensive review and their findings had been
communicated in detail to Mr. Taylor.
[63] Although
Mrs. Long stated to Mr. Taylor at the meeting that she was not willing to
prolong the process, Mr. Taylor responded that he wanted the matter concluded
quickly as well. When the offer was made, Mr. Taylor quickly accepted it. I
reject Mr. Taylor’s testimony that he asked for more time to consider it.
[64] The
pressure was not undue in the circumstances.
[65] Counsel
for the appellant also submits that this is an appropriate case for the
principle of unconscionable bargains to be applied.
[66] I disagree.
The principle of unconscionable bargains requires that: (1) Mr. Taylor was
dominated by the CRA in the settlement negotiations by reason of his ignorance,
need or distress, and (2) the settlement was clearly in the government’s
favour.
[67] Neither
of these elements exists here.
[68] As for
disparity in bargaining power, the evidence does not establish that there was
an inequity of bargaining power due to ignorance, need or distress.
[69] As for
the fairness of the settlement, counsel for the appellant submitted that the
relinquishment of the right to appeal is worth far more than any reduction of
the amount owing. I disagree with this. There is not a sufficient evidentiary
foundation for me to conclude that the settlement was more favourable to the
government than to Mr. Taylor.
[70] Finally, I
would briefly comment about the form of the waiver letter. Mr. Taylor testified
that he did not fully understand the statutory provisions that were referenced
in that letter. These provisions are reproduced above.
[71] The
waiver letter was apparently a standard form used by Mr. Itterman. I accept
that Mr. Taylor likely did not fully understand all the statutory references
that were referenced in the letter, but that does not make the settlement
invalid. What is relevant is that Mr. Taylor had a sufficient understanding of
the statutory provisions that were relevant to his situation. I find that he did.
Conclusion
[72] The conclusion that I have reached is that the
settlement agreement is valid and that the answers to the questions in this reference
are yes. The respondent is entitled to costs.
Signed at Ottawa, Canada this 5th
day of May 2010.
“J. M. Woods”
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