Date:
20130227
Docket:
T-56-08
Citation: 2013
FC 200
Ottawa, Ontario,
February 27, 2013
PRESENT: The
Honourable Mr. Justice Mandamin
BETWEEN:
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NRT TECHNOLOGY CORP
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Applicant
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and
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ATTORNEY GENERAL OF CANADA
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Respondent
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REASONS FOR
JUDGMENT AND JUDGMENT
[1]
This
is an application for judicial review in respect of the decision of M.
Thompson, Assistant Director, Toronto East Tax Services Office, Canada Revenue
Agency (the “Director”), dated December 14, 2007 to deny the Applicant’s
request for the cancellation of a penalty under the Taxpayer Relief Provisions
as permitted by subsection 220(3.1) of the Income Tax Act, RSC 1985, c 1
(5th Supp.) (ITA).
[2]
For
reasons that follow, I find the decision to be unreasonable and will grant the
application for judicial review.
Facts
[3]
The
Applicant, NRT Technology Corp. (NRT) is a corporation providing cash handling
solutions and products with headquarters in Toronto, Ontario. John Dominelli is
the President of NRT and has held this position for over 17 years.
[4]
On
February 28, 2006, NRT paid Mr. Dominelli a management bonus of $7,093,000 (the
“Bonus”). On March 14, 2006, NRT remitted withholding payroll taxes of
$2,848,548.80 on account of the payment of the Bonus.
[5]
On
March 23, 2006, the Canada Revenue Agency (CRA) assessed the Applicant a
$284,805 late remitting penalty. NRT was a “tier 2” or “accelerated” remitter
and had been notified by CRA in writing of its tier 2 remitter status in
November of 2005. As a “tier 2” remitter, NRT was required to remit its source
deductions in this instance by the third working day after the end of the
period from the 22nd through the last day of the month.
[6]
CRA
determined that the Applicant ought to have remitted the $2,848,548.80 on March
3, 2006 and NRT’s failure to remit the proper amount on this date warranted the
assessment of the penalty.
[7]
The
Applicant states that at the time of the payment of the Bonus, NRT outsourced
all of its payroll requirements to an independent payroll company, Ceridian.
The Bonus was not handled in the normal course and did not go through Ceridian
but rather was handled internally due to the implementation of tax advice by
Ms. Vaknin. She had been delegated by Charger Consulting Corporation (Charger)
and HS & Partners LLP (HS) which was retained by NRT to provide legal,
accounting, tax and financial planning advice to NRT. This included advice in
relation to the payment of the Bonus especially given the significant size of
the Bonus.
[8]
As
part of the advice from Ms. Vaknin, Mr. Dominelli was advised to purchase
flow-though shares to reduce the tax liability on the payment of the Bonus by
approximately 50%. Mr. Dominelli accepted the advice and purchased the
flow-through shares beginning in December, 2005.
[9]
In
February, 2006, NRT and Mr. Dominelli had several discussions with Ms. Vaknin
regarding the payment of the Bonus and the obligations of NRT with respect to
the withholding and remittance of tax on the payment of the Bonus. Ms. Vaknin
advised NRT to pay the bonus on or before February 28, 2006 but not to make any
payroll remittances to the CRA until she provided additional instructions.
[10]
On
March 13, 2006, Ms. Vaknin made an urgent call to Mr. Dominelli and informed
him that she had heard back from a person at the CRA and that she had been
advised that NRT was obliged to withhold and remit the full amount of the tax
due on the payment of the Bonus on or before March 15, 2006. As a result, on
March 14, 2006, Mr. Dominelli immediately arranged for NRT to remit the payroll
taxes of $2,848,548.80 on account of the payment of the Bonus.
[11]
As
a result of the tax planning advice involving the flow-through shares, on March
23, 2006, Ms. Vaknin requested, in writing, for a reduction of tax withholdings
for the taxation year ending December 31, 2006. By letters dated July 4, 2006
and August 15, 2006, the CRA accepted NRT’s request to reduce the withholding
required on the portion of the Bonus related to the flow-through shares.
Consequently, withholding was not required on the payment of $3,338,066 of the
$7,093,000 Bonus. The required withholding was lowered from $2,848,548 to
$1,507,481.50. Accordingly, the CRA reduced the 10% penalty at issue from
$284,804.88 to $150,748.15 (the “Penalty”). The CRA ultimately offset the
Penalty with GST refunds owed to NRT and the Penalty was paid in full in
November, 2006.
[12]
On
September 13, 2006, Mrs. Dominelli, the Human Resources Manager of NRT at the
time, filed for a request for the cancellation of the Penalty under the
taxpayer relief provisions in subsection 220(3.1) of the ITA. The basis
for the request was that NRT had exercised a reasonable amount of care with
respect to the remittance of payroll taxes on the payment of the Bonus and that
NRT had relied on professional advice and on information provided by the CRA.
[13]
On
November 9, 2006, the CRA responded by letter to the taxpayer relief request of
September 13, 2006. The CRA stated that a “review of the account history and
the circumstances outlined in [NRT’s] letter [had] failed to substantiate that
[NRT was] prevented from complying with the [CRA’s] requirements”. Further, the
CRA took the position that NRT failed to demonstrate that the lateness was the
result of extenuating circumstances or the result of CRA departmental error. As
a result, the CRA took the view that the directors of NRT did not exercise
reasonable care with respect to the remittance. The NRT’s taxpayer relief
request was accordingly denied.
[14]
On
July 18, 2007, NRT filed a second administrative review in relation to the
taxpayer relief request. The NRT took the position that it exercised a
reasonable amount of care and was not negligent or careless when it relied on
professional and CRA advice with respect to the remittance.
[15]
In
a letter dated December 14, 2007, the Director denied the second administrative
review.
Decision Under
Review
[16]
If
a taxpayer requests a second level review, an officer will review the
applicant’s second level review submissions and prepare a report that
recommends that taxpayer relief be denied or granted in whole or in part. The
ultimate decision maker for the second level review will review the report
prepared by the designated officer and decide whether to grant the relief
sought. In this case, the Director reviewed the second level review report
provided by the designated officer, John Collins. Both the second level review
report and the Director’s decision letter dated December 14, 2007 form the
decision at issue in this application.
Second Level
Review Report
[17]
The
second level review report (the “Report”) begins with a brief background of the
file. Included in the background is the fact that NRT previously requested and
received full relief from late filing penalties assessed for August and
September 2001 due to extraordinary circumstances. The Report also notes NRT’s
overall record of compliance was very good.
[18]
The
Report then goes on to provide a summary of the requests made by NRT for
taxpayer relief. The Report takes note of the first level request letter, then
discusses NRT’s second level request letter dated July 18, 2007. The Report
notes NRT cited paragraph 33 of Information Circular 07-1 and asserted that NRT
acted in accordance with the four basis factors listed. The Report then lists
the additional arguments submitted in support of NRT’s request for relief as
well as a list of supporting documents included with NRT’s second level
submissions.
[19]
The
Report concludes with the officer stating although the CRA appreciates the
magnitude of the penalty under review and acknowledges the role of discretion
in the process, the CRA is unable to arrive at a favourable decision in this
case. The Report states that the evidence suggests that the company exhibited a
degree of carelessness in its handling of the Bonus. This, together with the
NRT’s failure to act quickly to remedy the error, would suggest that the
condition for allowing an adjustment had not been met.
Decision Letter
[20]
In
the Decision Letter, the Director states taxpayers are responsible for meeting
their obligations under the legislation. As a result, taxpayers are generally
considered to be responsible for errors made by third parties.
[21]
The
Director states in the absence of extraordinary circumstances, errors/omissions
committed by the company’s duly authorized representative(s) must ultimately be
attributed to the company. The Director notes that the CRA issued written
notification to the company in November 2005 and November 2006 indicating the
company’s payroll remitter status.
[22]
The
Decision Letter states that the CRA was unable to conclude that the CRA erred
with respect to the due date for the remittance in question. The Decision
Letter notes the CRA does not suggest NRT acted knowingly to avoid complying
with its obligations. However, the Director states that the CRA was not in
receipt of any evidence to support the assertion that the company was
misdirected by the CRA or that the CRA failed to provide information to the
company in a timely manner.
[23]
The
Decision Letter acknowledges NRT’s history of good compliance and points out
that compliance history alone does not form the basis for a favourable
decision. The Director writes:
While we acknowledge the company’s history of
complying with its obligations, we would point out that compliance history
alone does not form the basis for a favourable decision. The record suggests
that the company exhibited a degree of carelessness in its handling of the
management bonus in question. This, together with the company’s failure to
quickly remedy the error, suggests that the conditions for allowing an adjustment
have not been satisfied and that, accordingly, relief should not be granted.
[24]
The
Director informs the NRT that cancellation of the late remitting penalty would
not be appropriate in this case.
Legislation
[25]
The
Income Tax Act, RSC 1985, c 1 (5th Supp.) provides:
220
(3.1) The Minister 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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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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Issues
[26]
Two
issues are raised in this application:
a. Was the CRA’s decision
to deny the Applicant’s request for taxpayer relief unreasonable?
b. Did the CRA fetter its
discretion in denying the Applicant’s request for taxpayer relief?
[27]
In
my view the determinative issue is whether the impugned decision is reasonable.
Standard of
Review
[28]
The
Supreme Court of Canada held in Dunsmuir v New Brunswick, 2008 SCC 9,
[2008] 1 S.C.R. 190 [Dunsmuir] that there are only two standards of review:
correctness for questions of law and reasonableness involving questions of
mixed fact and law and fact. Dunsmuir at paras 50 and 53.The Supreme
Court also held that where the standard of review has been previously
determined, a standard of review analysis need not be repeated. Dunsmuir
at para 62
[29]
Both
the Applicant and the Respondent agree, correctly in my view, that the
applicable standard of review for discretionary decisions of the Minister is
reasonableness. Lanno v Canada (Customs and Revenue Agency), 2005 FCA
153, 31 Admin LR (4th) 85
Analysis
[30]
The
Applicant begins by citing from decisions by the Federal Court and the Federal
Court of Appeal regarding the purpose and guidance on the interpretation of
subsection 220(3.1) of the ITA. Essentially, the Applicant argues that
s. 220(3.1) bestows a wide discretion on the Minister to waive or cancel
interest and penalties in order to grant relief from provisions of the ITA
that can resulting undue hardship because of the complexity of the tax laws and
which arise through no fault of their own. The Applicant submits that given the
broad authority available to the Minister to grant relief under s. 220(3.1) and
the extraordinary circumstances of the Applicant, the Minister’s decision to
deny the relief sought was unreasonable.
[31]
Amongst
other submissions, the Applicant specifically notes that in the Report, one of
the reasons the CRA decided not to provide relief was due to NRT’s “failure to
act quickly to remedy the error” without providing reasons as to how the
Applicant failed to act quickly to remedy any delay or omission. The Applicant
submits that it is unclear how the NRT did not act quickly to remedy the error
as once Ms. Vaknin made the urgent call that NRT was obliged to withhold and
remit the full amount of the tax due on the payment of the Bonus, NRT to remit
the payroll taxes of $2,848,548.80 on account of the payment of the Bonus.
[32]
The
Respondent submits that in situations where the reasonableness standard
applies, the Court should deter to the CRA and not reweigh the factors to
substitute its judgment for that of the decision maker.
[33]
The
Respondent notes the CRA rejected the Applicant’s request on several grounds
including that the Applicant failed to act quickly to remedy its error. The
Respondent submits the CRA concluded that the Applicant had not moved swiftly
to remedy its error and cites from the Report where the officer stated:
We are unable to conclude that the company acted
quickly to address the balance due. Jacqueline Dominelli states in her letter
of September 12, 2006 letter [sic] that the company did not make any
payments toward the penalty because it had received assurance from CRA Payroll
Headquarters that the penalty would be waived. We can find no evidence to
indicate that the CRA provided such assurance to the company.
The [CRA] ultimately retired the debt by applying
several of the company’s GST refunds against the balance due.
[34]
The
excerpt in paragraph 23 above clearly indicates that the Director considered
the company’s failure to quickly remedy the error to be one of the primary
reasons for denying taxpayer relief. However, the Director’s reasons do not
indicate how the company failed to remedy the error. The error at issue was the
company’s failure to remit the $2,848,548.80 on account of the payment of the
Bonus by the due date of March 3, 2006. This error led to the Penalty from
which the Applicant sought relief.
[35]
Since
the Director held that the company’s failure to quickly remedy the error was a
reason for denying relief, one must look at how the error was remedied. The
evidence is that the NRT was not aware that the remittance was due on March 3,
2006 and instead believed that it was due on March 15, 2006. The Applicant
submits that once Ms. Vaknin made the urgent call to Mr. Dominelli that NRT was
obliged to withhold and remit the full amount of the tax due on the payment of
the Bonus, Mr. Dominelli immediately arranged for NRT to remit the full
$2,848,548.80. The remittance was made on March 14, 2006, the day after Ms.
Vaknin’s call, but 11 days past the due date.
[36]
The
evidence is clear that the error was remedied by the Applicant 11 days after
the error was made. It is also clear that the error was remedied without
intervention from the CRA. In fact, no communication was received from the CRA
regarding the error until early April 2006.
[37]
The
CRA was not aware that an error had been made until early April 2006. By that
time, the full $2,848,548.80 had already been remitted. The Decision Letter
makes no indication why the company’s correction of the error was not “quick”
enough to satisfy the Director, nor does the Decision Letter state how the
company could have remedied the error any quicker than it did.
[38]
The
cite in paragraph 33 above seems to indicate that the error considered in the
Report was not the NRT’s failure to remit the taxes when due, but timing of the
payment of the penalty assessed. There are two issues with this. First, the
Report states that the CRA was unable to conclude that the company had acted
quickly to address the “balance” due. It is not clear whether the “error”
referred to in the Decision Letter referred to the company’s error in remitting
the amount due or whether it referred to the balance due on the Penalty.
[39]
Second,
while the NRT may not have made any payments toward the penalty as of September
12, 2006, the NRT had addressed and taken steps to have the Penalty amount
reduced via the flow-through shares plan. This reduced the total amount of tax
that was required to be withheld which in turn reduced the balance of the
penalty. This process was started in late March 2006 and the amount owed by the
NRT was reduced by the CRA in July and August, 2006. The Applicant would not
have known the correct and final amount owed on the Penalty until after the
deduction was made. It is also important to note that the CRA ultimately offset
the Penalty with GST refunds owed to NRT and the Penalty was paid in full in
November, 2006. There is no indication whether this was done at the behest of
the NRT or on the CRA’s own behalf.
[40]
It
is not clear which “error” the Director was referring to in his decision, nor
how the Applicant failed to remedy the error, regardless of whether the error
was the failure to remit or to address payment of the final penalty amount. The
evidence supports the Applicant’s claim that it quickly remedied its failure to
remit the amount due and that it took steps to address the penalty owed as a
result of the assessment.
[41]
As
a result, I find that the Decision Letter’s conclusion that “This, together
with the company’s failure to quickly remedy the error, suggests that the
conditions for allowing an adjustment have not been satisfied and that,
accordingly, relief should not be granted” to be equivocal and, in either case,
inconsistent with the evidence before the Director.
Conclusion
[42]
I
find the Director’s decision that NRT failed to quickly remedy the error to be
unreasonable as it fails the requirements of being justified, transparent and
intelligible as required under Dunsmuir.
[43]
The
application for judicial review succeeds and I would send the matter back for
re-determination.
JUDGMENT
THIS
COURT’S JUDGMENT is that:
1. The
decision under review is quashed and the matter is returned to be re-determined
by a different decision maker.
2. Costs
in favour of the Applicant.
“Leonard S. Mandamin”