Docket: T-1251-10
Citation: 2011
FC 1309
Vancouver, British
Columbia, November 15, 2011
PRESENT: The Honourable Mr. Justice O'Reilly
BETWEEN:
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TOASTMASTER INC.
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Applicant
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and
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THE MINISTER OF NATIONAL REVENUE AS
REPRESENTED BY THE ATTORNEY GENERAL OF CANADA
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Respondent
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REASONS FOR JUDGMENT AND
JUDGMENT
I. Overview
[1]
Toastmaster
Inc. sought relief from the payment of interest on its income tax. The Canada
Revenue Agency [CRA] imposed interest amounts because Toastmaster had been late
in filing its returns for the years 2001, 2002, and 2005. The Minister of
National Revenue denied Toastmaster’s request and refused to exercise his
discretion to grant the relief provided under s 220(3.1) of the Income Tax
Act, RSC 1985, c 1 [ITA].
[2]
Toastmaster
argues that the Minister erred in his interpretation of the ITA and rendered an
unreasonable decision. It asks me to set aside the Minister’s decision and
refer the matter back for reconsideration.
[3]
However,
I cannot find any basis for overturning the Minister’s decision. In my view,
the Minister’s interpretation of the ITA was correct, and his decision was
reasonable. I must, therefore, dismiss this application for judicial review.
[4]
There
are two issues:
1. Did
the Minister err in his interpretation of the scope of his discretion to waive
penalties and interest pursuant to s 220(3.1) of the ITA?
2. Was the Minister’s
decision to deny relief reasonable?
II. Factual Background
[5]
Toastmaster
is a U.S. resident
corporation, incorporated in the State of Missouri, which
produces and sells kitchen appliances and other household items. Toastmaster
conducted business in Canada from 1999 to 2008.
[6]
When
it started up its operations in Canada, Toastmaster claims that it was advised by
the accounting firm Deloitte & Touche that it did not have a Permanent
Establishment [PE] in Canada, as defined in the Canada-U.S. Income Tax
Convention [the Treaty]. As a result, Toastmaster believed it did not need to
file federal or provincial tax returns in Canada.
[7]
Between
2004 and 2006, Toastmaster and its corporate parent, Salton Inc., retained
in-house tax personnel. The issue of whether Toastmaster had a PE in Canada was
reconsidered and fresh tax advice was provided by PricewaterhouseCoopers LLP [PWC].
PWC concluded that Toastmaster indeed had a PE in Canada, and that
Canadian federal and provincial returns should have been filed for taxation
years ending in June 2000 through June 2006. PWC advised Toastmaster to submit
a request to the CRA to file returns for these years through the Voluntary
Disclosure Program [VDP].
[8]
On
July 24, 2006 an initial VDP request was sent by PWC on behalf of Toastmaster
requesting review and assessment of the returns. Toastmaster claims that it
believed at the time of this request that it was at, or close to, a net loss
position for the taxation years in question.
[9]
On
March 28, 2008 the completed federal VDP submission, along with the returns and
other required documents, was filed for the taxation years ending in June 2000
through June 2007. At the time of filing, loss carry-back and carry-forward
requests were made to eliminate any taxes payable for the taxation years ending
in June 2001 and June 2005, and Part I tax payable was reduced to $42,361 for
the year ending in June 2002. A cheque was provided to CRA for this amount to
ensure that all tax payable was paid in full.
[10]
Toastmaster
was issued Notices of Assessment for those taxation years, and no late filing
penalties were imposed in keeping with the VDP request. However, subsequent
Notices of Reassessment were issued on August 7, 2009 which assessed arrears
interest pursuant to s 161(1) of the ITA for the 2001, 2002 and 2005 taxation
years. Interest was assessed to be $346,718.17, $125,110.24, and $142,974.35
for the 2001, 2002 and 2005 taxation years, respectively. Toastmaster claims
that arrears interest was assessed despite the fact that it owed only minimal
amounts of tax at the time of filing given the significant loss carry-backs and
carry-forwards that were available to it.
[11]
PWC,
on Toastmaster’s behalf, filed a request for a cancellation of the interest on
the basis that Toastmaster had acted quickly (once it became aware that it had
a PE) to remedy its tax filing deficiencies, that only a minimal amount of tax
was outstanding at the time of filing through the VDP, and that the balance due
at the time of filing of the final VDP package was paid in full. Toastmaster
also claimed that it was unable to pay the assessed arrears interest due to a
lack of liquid assets.
[12]
A
Minister’s delegate rejected Toastmaster’s request. Toastmaster, through PWC,
submitted a request for second level review with the Director, International
Tax Services Office, complaining that the delegate had unduly fettered her
discretion. The request for relief at the second level was denied.
III. The Minister’s Decision
[13]
The
Minister’s first decision was made by an official in the CRA’s International
Tax Services Office. The Minister’s second decision was made by the Director,
International Tax Services Office.
(a) First level decision
[14]
The
Minister’s delegate observed that the taxpayer relief legislation grants the
Minister, through his delegates, the authority to cancel all or part of a
penalty and/or interest charges “where circumstances beyond the taxpayer’s
control” prevent the taxpayer from complying with the ITA. She then noted that
the legislation allows for an adjustment where extraordinary circumstances such
as natural disasters or a serious illness prevent a taxpayer from complying
with the ITA, or where the charges result from the CRA’s own actions.
[15]
However,
she also noted that under Canada’s self-assessment system of taxation, it is a
corporation’s responsibility to file correct and complete tax returns, and to
pay any outstanding amount by the required due date.
[16]
The
delegate found that Toastmaster had not shown that it was prevented from
complying with filing requirements due to factors beyond its control, or that
payment of the interest would cause it undue hardship. Accordingly, it would be
inappropriate to cancel interest charges in these circumstances.
(b) Second level
decision
[17]
The
Minister’s delegate prepared a “Taxpayer Relief Fact Sheet” summarizing the
circumstances:
• An
outstanding balance had been allowed to exist and accrue interest, because tax
became payable in June 2001 but was not remitted to the CRA until March 2008;
• Toastmaster
had not exercised reasonable care, nor had it acted quickly to remedy any
delays or omissions, given that:
- The
requirement to file a T2 return for a corporation is not dependent on having a
PE in Canada, pursuant to s 150 of the
ITA;
- Toastmaster
did not demonstrate that it had exercised a reasonable amount of care under
the self-assessment system; and
- There
was no demonstration of extenuating circumstances to justify waiving the
arrears interest assessed, because taxpayers are generally liable for errors
made by third parties.
• The
request for relief on the basis of financial hardship was not well-founded,
because the definition of “hardship” for a corporation is where the continuity
of business operations and the continued employment of a firm’s employees are
jeopardized. Since Toastmaster had already ceased operations at the time of its
request, it would be of no material consequence to grant relief to an inactive
corporation.
[18]
This
Fact Sheet formed the basis for the decision letter sent to Toastmaster. In the
letter, the Minister’s delegate noted that Toastmaster’s account had been
reviewed together with Toastmaster’s submissions and the relevant legislation.
However, it was also noted that there was no information that would change the
first level decision, as the essential facts remained the same.
[19]
Therefore,
the Minister’s delegate concluded that the arrears interest had been properly
levied on Toastmaster.
IV. Issue One - Did the Minister
err in his interpretation of the scope of his discretion to waive penalties and
interest pursuant to s 220(3.1) of the ITA?
[20]
Toastmaster
submits that the Minister’s delegates fettered the wide discretion accorded to
them through s 220(3.1) of the ITA by limiting their analyses to the specific
situations outlined in the Guidelines. In particular, Toastmaster says that the
Minister’s delegates unnecessarily relied on paragraphs 23 and 25 of the
Guidelines, which provide:
23. The Minister may grant relief
from the application of penalty and interest where the following types of
situations exist and justify a taxpayer's inability to satisfy a tax obligation
or requirement at issue:
(a) extraordinary
circumstances
(b) actions of the CRA
(c) inability to pay or
financial hardship
25. Penalties and interest may be
waived or cancelled in whole or in part where they result from circumstances
beyond a taxpayer's control. Extraordinary circumstances that may have
prevented a taxpayer from making a payment when due, filing a return on time,
or otherwise complying with an obligation under the Act include, but are not
limited to, the following examples:
(a) natural or man-made
disasters such as, flood or fire;
(b) civil disturbances
or disruptions in services, such as a postal strike;
(c) a serious illness
or accident; or
(d) serious emotional
or mental distress, such as death in the immediate family.
[21]
Toastmaster
submits that the wording of s 220(3.1) discloses no requirement to demonstrate
“extraordinary circumstances beyond the taxpayer’s control”, contrary to
paragraph 25(a) of the Guidelines. Toastmaster relies on Nixon v Minister
of National Revenue, 2008 FC 917 at para 5, [Nixon], where the Court
noted that s 220(3.1) gives the Minister broad, open-ended discretion, and that
the Guidelines themselves are non-binding. Toastmaster also notes that the
jurisprudence has held that the Guidelines “are not intended to be exhaustive
or to restrict the spirit or intent of the legislation”: Lalonde c Canada
(Agence du revenu), 2008 CF 183 at para 9; Nixon, above at para 6; Spence
v Canada (Revenue Agency), 2010 FC 52
at paras 25-26, [Spence]. Toastmaster notes that in Spence, above
at paras 30-31, Justice John O’Keefe determined that it is for the Minister to
look beyond the Guidelines and apply the broad discretion he is afforded by the
ITA. Toastmaster says that the Minister’s delegates failed to consider its
particular circumstances, failed to apply the broad discretion given under s
220(3.1), and allowed reliance on the Guidelines to impede the exercise of that
discretion.
[22]
At
the outset, it is important to note that it is only the “second level”
reconsideration decision that is, strictly speaking, the decision under review.
The first level decision is beyond the scope of review on this application.
[23]
In
my view, having reviewed the record, the Minister’s delegate did not fetter her
discretion by considering herself bound by the Guidelines or other
administrative policies. At the second level, she reviewed and considered all
of the information and submissions available and referred to the Guidelines in
the exercise of her discretion. I do not see any indication that the Minister
treated the Guidelines as binding. In this way, the present case is
distinguishable from Spence, above.
[24]
Further,
the Minister’s delegate did not conclude that she could only grant relief if
“extraordinary circumstances” were demonstrated or if any of the other specifically
enumerated grounds in the Guidelines were made out. Rather, the second level
decision letter, supported by the second level Fact Sheet, shows that the
Minister’s delegate considered all of Toastmaster’s submissions and
explanations but found them to be wanting. The delegate clearly explained why she
believed relief was not warranted, with reference to Toastmaster’s positions on
the issues.
V. Issue Two - Was the Minister’s
decision to deny relief reasonable?
[25]
Toastmaster
submits that given the broad authority available to the Minister under the ITA
to grant relief, and Toastmaster’s special circumstances, the decision to deny
relief from the arrears interest was unreasonable.
[26]
First,
Toastmaster submits that the Minister’s delegates failed to take into account
the errors made by third parties acting on behalf of the taxpayer. While third
party errors are generally not grounds for relief, the Minister’s Guidelines at
para 35 refer to the possibility of taking these errors into account in
“exceptional situations”.
[27]
Second,
Toastmaster says that the Minister’s delegate failed to take into account the
fact that it acted quickly to remedy its situation, and voluntarily brought the
matter to the attention of the CRA by making submissions under the VDP.
[28]
Third,
Toastmaster says that the Minister’s delegate failed to give adequate weight to
the fact that Toastmaster had no previous compliance issues under the ITA.
[29]
Fourth,
Toastmaster submits that there are “unexplained discrepancies” between the
first level of review and the second level of review that put the
reasonableness of the decision in doubt. For instance, at the second level of
review it was stated that the taxpayer “did not act quickly” to remedy any
delay or omission (without explaining how Toastmaster failed to act quickly),
while at the first level of review it was stated that Toastmaster did “act
quickly” to remedy any delay or omission. Similarly, there were discrepancies
at the two levels of review regarding whether or not Toastmaster had allowed a
balance to exist and accrue interest.
[30]
Fifth,
Toastmaster asserts that at the first level of review it was noted that
Toastmaster had been “negligent or careless in conducting [its] affairs under
the self-assessment system” and “should have sought professional advice
earlier”. However, Toastmaster says that it did seek tax advice from Deloitte
& Touche at the time it began its Canadian operations and later sought tax
advice from PWC. Thus, Toastmaster says that it exercised reasonable care and
was not negligent.
[31]
Finally,
Toastmaster submits that it owed only $42,361 in taxes once the returns for the
years in issue were filed, but was nonetheless assessed hundreds of thousands
of dollars in arrears interest. Toastmaster says that the Minister’s delegates’
overly rigid application of the ITA led to an absurd result, especially
considering the fact that Toastmaster found the error through its own due
diligence and voluntarily brought the issue to the CRA’s attention.
[32]
The
Minister’s delegates were well aware of Toastmaster’s submissions with respect
to the third party errors they claim were made by Deloitte & Touche.
However, in an exercise of their discretion afforded to them under the ITA,
they concluded that Toastmaster had not adequately explained why its T2 returns
had never been filed. Information that was publicly available at the time
indicated that even if a corporation did not have a PE, it would still be
required to file T2 returns. This failure indicated that reasonable care had
not been exercised, especially in the absence of any obviously extenuating
circumstances.
[33]
It
is true that Toastmaster voluntarily brought its situation to the CRA’s
attention through the VDP. However, it is arguable whether it did so “quickly”.
In one sense, it acted quickly once it discovered its problems, sometime
between 2004 and 2006. On the other hand, with reasonable care, the problem
would have been discovered many years earlier.
[34]
As
to Toastmaster’s submission that the Minister’s delegates failed to consider
its prior compliance history, there was simply no prior compliance history for
the Minister’s delegates to consider – no returns whatsoever were filed for any
taxation year prior to 2008.
[35]
With
respect to the alleged “discrepancies” between the findings made by the
Minister’s delegates at the first level and the second level, the first level
decision is not the decision under review here. The findings at the second
level superseded those at the first level. In any event, the existence of
discrepancies does not lead to a conclusion that the second decision was
unreasonable. The only question is whether those findings are supported by
justified, transparent and intelligible explanations.
[36]
Finally,
with respect to Toastmaster’s submission that the result is plainly absurd and
harsh, I cannot agree. The Minister’s delegates reasonably concluded that
Toastmaster’s situation was brought about by its own unreasonable errors. By
the time it filed its final VDP submission in 2008, its outstanding balance
owing was not large, taking into account the application of eight years of loss
carry-forwards and carry-backs, effectively reducing the amount of net tax
owing. Much more tax would have been payable in Toastmaster’s profitable years
had timely filings been made. And it is on those amounts that arrears interest
was applied.
[37]
I
would adopt the comments of Justice Paul Crampton in Fleet v Canada (Attorney
General), 2010 FC 609 at para 29, that “the law is well established that
taxpayers are "directly responsible for the actions of those persons
appointed to take care of [their] financial matters"…and that they
"are expected to inform themselves of the applicable filing
requirements".” [Citations omitted.]
[38]
For
these reasons I would conclude that the Minister’s decision to decline to waive
interest was a reasonable one, well within the range of possible, acceptable
outcomes defensible on the facts and the law.
VI. Conclusion and Disposition
[39]
The
Minister’s delegate did not fetter her discretion by considering herself bound
by the Guidelines or other administrative policies. She explained why she
believed relief was not warranted in this case, with appropriate reference to
Toastmaster’s positions on the issues, the legislation, and the Guidelines.
[40]
Further,
I can find no basis for concluding that the decision to deny relief from the
arrears interest lacked justification, transparency or intelligibility or that
it falls outside of the range of acceptable outcomes defensible on the facts
and in law.
[41]
I
must, therefore, dismiss this application for judicial review, with costs.
JUDGMENT
THIS COURT’S JUDGMENT
is that:
1. The application for judicial
review is dismissed with costs.
“James
W. O’Reilly”
Annex
Income Tax
Act, RSC 1985,
c 1
General
161. (1) Where at any time after a
taxpayer’s balance-due day for a taxation year
(a) the total of the taxpayer’s
taxes payable under this Part and Parts I.3, VI and VI.1 for the year
exceeds
(b) the total of all amounts
each of which is an amount paid at or before that time on account of the
taxpayer’s tax payable and applied as at that time by the Minister against
the taxpayer’s liability for an amount payable under this Part or Part I.3,
VI or VI.1 for the year,
the taxpayer shall pay to the Receiver
General interest at the prescribed rate on the excess, computed for the
period during which that excess is outstanding.
Waiver of penalty or interest
220. (3.1)
The Minister’s delegates may, on or before the day that is ten calendar years
after the end of a taxation year of a taxpayer (or in the case of a
partnership, a fiscal period of the partnership) or on application by the
taxpayer or partnership on or before that day, waive or cancel all or any
portion of any penalty or interest otherwise payable under this Act by the
taxpayer or partnership in respect of that taxation year or fiscal period,
and notwithstanding subsections 152(4) to (5), any assessment of the interest
and penalties payable by the taxpayer or partnership shall be made that is
necessary to take into account the cancellation of the penalty or interest.
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Loi
de l’impôt sur le revenu,
LRC 1985, ch 1
Disposition
générale
161. (1)
Dans le cas où le total visé à l’alinéa a) excède le total visé à l’alinéa b)
à un moment postérieur à la date d’exigibilité du solde qui est applicable à
un contribuable pour une année d’imposition, le contribuable est tenu de
verser au receveur général des intérêts sur l’excédent, calculés au taux
prescrit pour la période au cours de laquelle cet excédent est impayé :
a) le total des impôts payables par le
contribuable pour l’année en vertu de la présente partie et des parties I.3,
VI et VI.1;
b) le total des montants représentant
chacun un montant payé au plus tard à ce moment au titre de l’impôt payable
par le contribuable et imputé par le ministre, à compter de ce moment, sur le
montant dont le contribuable est redevable pour l’année en vertu de la
présente partie ou des parties I.3, VI ou VI.1.
Renonciation
aux pénalités et aux intérêts
220.
(3.1) Le ministre peut, au plus tard le jour qui suit de dix années civiles
la fin de l’année d’imposition d’un contribuable ou de l’exercice d’une
société de personnes ou sur demande du contribuable ou de la société de
personnes faite au plus tard ce jour-là, renoncer à tout ou partie d’un montant
de pénalité ou d’intérêts payable par ailleurs par le contribuable ou la
société de personnes en application de la présente loi pour cette année
d’imposition ou cet exercice, ou l’annuler en tout ou en partie. Malgré les
paragraphes 152(4) à (5), le ministre établit les cotisations voulues
concernant les intérêts et pénalités payables par le contribuable ou la
société de personnes pour tenir compte de pareille annulation.
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