Date: 20050506
Dockets: T-1692-04
T-1693-04
Citation: 2005 FC 639
BETWEEN:
AASHISH M. KARIA
Applicant
and
MINISTER OF NATIONAL REVENUE
Respondent
AND BETWEEN:
M. KARIA LTD.
Applicant
and
MINISTER OF NATIONAL REVENUE
Respondent
REASONS FOR ORDER
STRAYER D.J.
INTRODUCTION
[1] These two applications brought by an individual and his wholly-owned corporation involve the same facts and were argued together. They seek judicial review to set aside a decision contained in a letter of August 19, 2004 from the Canada Customs and Revenue Agency (CCRA) on behalf of the respondent Minister in which the CCRA confirmed that the applicants did not qualify for the Voluntary Disclosures Program (VDP). That letter was simply confirming the decision already conveyed to the applicants in a letter of February 18, 2004.
[2] Subsection 220(3.1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th sup.) authorizes the Minister to waive or cancel all or any portions of a penalty or of interest otherwise payable under that Act. Section 281.1 of the Excise Tax Act, R.S.C. 1985, c. E-15 makes similar provision for the waiving of penalties and interest with respect to the Goods and Services Tax. This discretionary power is exercised in part by a Voluntary Disclosures Program which was described, at the time in question, by Information Circular 00-1R dated September, 2002. It states the purpose of the program to be to promote voluntary compliance with reporting and payment of taxes and "encourages clients to come forward and correct deficiencies to comply with their legal obligations". The Information Circular in question deals with clients who have deliberately omitted to report and pay. (There are other programs for those who have inadvertently omitted reporting or who have been unable to comply due to circumstances beyond their control). The incentive for making voluntary disclosures of past omissions under this program is that if full disclosure is made to the satisfaction of the CCRA then the discretion of the Minister may be exercised so as to waive all or part of the penalties that otherwise could be imposed.
[3] The conditions for a valid disclosure are set out in paragraph 6 of the Information Circular. Subparagraph (a) states as follows:
The disclosure must be voluntary. The client has to initiate the voluntary disclosure. A disclosure may not qualify as a voluntary disclosure under the above policy if it is found to have been made with the knowledge of an audit, investigation, or other enforcement action that has been initiated by the CCRA, or other authorities or administrations with which the CCRA has information exchange agreements.
Subparagraph (b) requires that the disclosure be complete. Subparagraph (c) requires that the disclosure must involve at least one penalty in order to qualify for this program and subparagraph (d) requires that the information disclosed must be either at least one year past due or not initiated simply to avoid late filing or instalment penalties. It is subparagraph (a) which is the most pertinent to this case. It is common ground that the Information Circular is made available to the public and that the applicants and their legal representative proceeded in their disclosures on the basis of the information provided in this circular.
FACTS
[4] On September 17, 2003 the Peel Regional Police executed search warrants on the residence and business of the applicants in connection with a fraud investigation. On the same day the Investigations Division of CCRA had requested the tax returns of these applicants for study. On September 18, 2003 the Peel Regional Police referred certain information from their search to the Investigations Division of CCRA. On October 14, 2003 the applicants' counsel had a telephone conversation with an officer of CCRA concerning the VDP and pursuant to that conversation he wrote to CCRA on October 17, 2003 on a "no-name basis". He advised that according to his information his clients had received credit card payments and deposited them in bank accounts without reporting them as income. He noted that it was possible that some of these amounts had been received on account of Goods and Service Tax that had not been remitted. He also reported his understanding that the individual client had earned some interest income in respect of funds deposited offshore which had not been reported. He advised that his unnamed individual client had been charged by an unnamed police force "with a minor fraud" and that an investigating officer had mentioned to his client that the police might notify CCRA that he had failed to report income tax. The police officer had not made it clear whether such notification would actually occur or when, and to the best of the knowledge of the client and his counsel it had not yet occurred. He stated that because the police were holding his client's records they were not in a position to ascertain the quantum of unreported income. He concluded his letter with this paragraph:
Based on our telephone discussion, I understand that under the circumstances described above the CCRA will view the disclosure to be made by our clients as voluntary, for the purposes of the Voluntary Disclosure Program. Please confirm that understanding by signing below and returning to my attention a copy of this letter.
CCRA did not confirm this "understanding" by signing the letter. However on October 21 CCRA sent a letter to the applicants' counsel which included this paragraph:
Based on the circumstances described we consider that the disclosure would be valid as presented. However our determination has been made based on the facts as presented and could change if any new details come to light during the handling of the actual full disclosure. Therefore, a full determination of whether we can accept the voluntary disclosure as valid cannot be confirmed until after the names of your clients are given and all facts are verified. In this regard at the time of the full disclosure the information provided should meet the following four conditions to be valid. . . .
There then followed the quotation of the four conditions set out in the Information Circular, in subparagraphs 6(a), (b), (c) and (d) as referred to above. As a result the applicants' counsel sent a letter to CCRA on January 19, 2004 disclosing the names of the individual client and his company, together with the individual's address and social insurance number and other identifying information in respect of the company. This was the only new information disclosed but the letter noted that "we are preparing the necessary details of their voluntary disclosure and will send them to you in due course". CCRA replied by writing a letter to the individual taxpayer on February 18, 2004 to advise him "of our decision concerning your request for the waiver of penalties under the Voluntary Disclosure Program. . . ." It went on to say:
The circumstances of your case have been carefully considered and I regret to inform you that your request cannot be granted. Four conditions must be satisfied to qualify for the benefits of the VDP. Unfortunately, the disclosure was not considered to be voluntary since it was initiated based on the knowledge of current enforcement activities.
[5] The individual taxpayer through his counsel sought an administrative review of this decision. He was advised by CCRA in a letter of August 19, 2004 that a review had taken place and the decision would not be changed. In seeking judicial review of the August 19, 2004 decision the applicants are really seeking a review of the decision conveyed to them on February 18, 2004 which was simply confirmed in the later letter.
[6] It will be noted that in the letter of February 18, 2004 the reason for finding the applicants disqualified for the VDP was that "the disclosure was not considered to be voluntary since it was initiated based on the knowledge of current enforcement activities". The CCRA takes the position that this is based on subparagraph 6(a) of the Information Circular which says that a disclosure is not voluntary if it is made by a taxpayer with the knowledge of an audit, investigation, etc. already initiated by the CCRA or other authorities "with which the CCRA has information exchange agreements". In his initial contact with CCRA counsel for the applicants raised the question as to whether, due to the fact that the police officer had said they might report information to the CCRA, would CCRA still consider a disclosure to be voluntary. According to the notes made by the CCRA Officer who spoke with counsel, he
[e]xplained that we may as it sound [sic] like the client was not aware of any compliance action by CCRA but would need to have the details in writing before we could formally make that type of decision.
There is nothing in the record to indicate that the applicants had knowledge that the Peel Regional Police constituted an authority "with which the CCRA has information exchange agreements" as required in subparagraph 6(a) of the Information Circular. Further there is no documentary evidence of any such agreement existing. Internal discussions within CCRA, as described in their records, indicate that some officers believed there to be such an agreement. However when counsel for the applicants, in preparation for the hearing of this matter, quite properly requested a copy of such agreement from the Department of Justice representing the respondent, he received a letter of November 29, 2004 which stated in part as follows:
I have been advised that there is no written agreement. It is merely an informal relationship that exists between the CCRA office in Toronto West, the Investigation Division and Fraud Bureau of the Peel Regional Police.
This information was not provided on a "Without Prejudice" basis and I regard it as an admission properly made by counsel.
ANALYSIS
[7] It is common ground that the Information Circular and the Guidelines concerning the VDP are not delegated legislation and have no force of law as such.
[8] The applicants contend, however, that the terms of the Information Circular, particularly paragraph 6 thereof, create procedural entitlements and constraints which prevent the Minister's discretion being exercised as it was in the letters of February 18 and August 19, 2004. They argue that either the respondent acted without jurisdiction because it had already determined by the letter of October 21, 2003 that the applicants' disclosure would be considered voluntary; or that the applicants had a legitimate expectation that the respondent's later disclosure would not be considered involuntary because of the commitment made in the letter of October 21; or that the respondent is estopped from denying that the disclosure is voluntary having led the applicants to believe by the letter of October 21, 2003 that it would be treated as voluntary; or that the respondent's decision of February 18, 2004, as confirmed by the letter of August 19, 2004 was patently unreasonable.
[9] I believe the matter can be determined on the basis of the last two submissions combined. First, I believe that the requirements of promissory estoppel exist here. Those requirements are that there must be a promise that the promisor will conduct himself in a certain way in certain circumstances. There must be reliance on that promise by the promisee, and to the detriment of the promisee. In such circumstances the promisor will not be allowed to exercise his discretion in a manner inconsistent with the promise, if he otherwise has lawful authority to fulfill that promise. See e.g. Aurchem Exploration Ltd. v. The Queen (1992), 91 D.L.R.(4th) 710 (F.C.T.D.); W & R Plumbing and Heating Ltd. v. The Queen, [1986] 2 F.C. 195 (F.C.T.D.). Here the promise exists in the form of the Information Circular which says in effect, in subparagraph 6(a) that a disclosure will be treated as voluntary if the client initiates it, subject to it being considered involuntary if the client initiates the disclosure with the knowledge of an audit, investigation, etc. by the CCRA or "authorities or administrations with which the CCRA has information exchange agreements". After counsel for the applicants had specifically advised CCRA that they had been the target of a police search by an unidentified police force and that a police officer had said his force might report information to the CCRA, CCRA wrote the letter of October 21, 2003 to counsel saying that "based on the circumstances described we consider that the disclosure would be valid as presented". There was of course the usual warning that this would have to be confirmed after full disclosure was made "and all facts are verified". Read together with the Information Circular, this was an invitation to proceed with disclosure on the basis of the facts as disclosed so far, and the applicants were entitled to assume that unless there were undisclosed facts which were pertinent to the question of whether they had knowledge of an investigation already under way they could assume that further disclosures would be regarded as voluntary. They acted to their detriment. In the letter from their counsel of January 19, 2004 they revealed their identity. While the bare fact of giving their identity may not of itself have been to their detriment, when combined with the information which their counsel had already provided on a "No-name" basis in the letter of October 17, 2003 they had disclosed to CCRA that they had received undisclosed monies which they owed for income tax and GST. Further the individual client by the combination of these letters had disclosed that he had earned interest on income from funds deposited offshore.
[10] I am therefore of the view that the respondent was estopped from deciding this matter on a basis other than as specified in subparagraph 6(a) of the Information Circular. The applicants were entitled to rely on that as the manner in which their disclosure would be dealt with. In determining whether the respondent complied with the language of the Information Circular, I believe the appropriate standard of review is that of reasonableness simpliciter. It involves in part the interpretation of the language of the Information Circular which in my view is the governing instrument, and its application to these facts. I believe the Court has as much expertise as the Officers of CCRA in interpreting this language. The matter is therefore analogous to a mixed question of law and fact and I believe the appropriate standard is reasonableness. I might add however that if I am wrong in this, and greater deference is owed, I would still consider that the decision of the respondent was patently unreasonable.
[11] It is clear to me that the respondent never addressed the question of whether the applicants had made their disclosure with the knowledge of an audit or investigation by an authority or administration with which the CCRA had an information exchange agreement as required in subparagraph 6(a) of the Information Circular. It is clear from an internal document of CCRA that they accepted that the applicants were not aware of the CCRA investigation which had been initiated in September, 2003:(see applicants' record volume 1, page 69). Internal records of CCRA which show what information the CCRA had before it in making its decision that disclosure was involuntary, indicate that officers only focussed on whether the Peel Regional Police had an exchange of information agreement with CCRA but not whether the applicants had knowledge of it. CCRA did not know the identity of the police force in question until after the applicants made their disclosures by counsel of January 19, 2004 providing their names. As a result CCRA was able to trace through their names the fact that a CCRA investigation of the applicants was already under way and that the Peel Regional Police Force was the force involved with these parties, having already provided information to CCRA in September, 2003 (see applicants' record volume 1, page 70). Once CCRA officers learned, or believed that they had learned, that there was an "agreement with" the Peel Regional Police, that was apparently considered determinative of the matter. But there is nothing to indicate, and clearly CCRA did not concern itself about the matter, that these applicants would have had knowledge that the Peel Regional Police Force had an agreement with the CCRA. Counsel for the respondent seemed to argue that it was sufficient if the applicants ought to have known of such an agreement or ought to have found out if there was such an agreement: in other words knowledge in paragraph 6(a) includes constructive knowledge. I am unable to interpret the language of the Information Circular in that way. If CCRA wishes to administer a program on that basis it should modify the Information Circular accordingly. If it does so, however, it should also provide some anonymous means for taxpayers learning with which agencies or authorities it has such agreements, perhaps through a website or publication in the Canada Gazette.
[12] Although this disposes of the matter I would also add that I have great difficulty in accepting that the CCRA had proper information before it as to the existence of an "information exchange agreement" between the CCRA and the Peel Regional Police Force. While the internal report made by the relevant appeals officer states that such an agreement existed, when their counsel was asked for a copy of it he advised that there was no "written agreement" but only an "informal relationship". An "informal relationship" does not meet the requirement of "an information exchange agreement" in the Information Circular, nor I suggest does it meet basic requirements of transparency to allow a taxpayer to know in advance whether some agency investigating his affairs has an agreement with CCRA. Among other things, we have no idea when this "arrangement" came into effect nor whether the information here was within the scope of that agreement. It is surprising that when CCRA was informed on October 17 by the "No-name" disclosure of the fact of a search by an unnamed police force and of the conversation between a police officer and the taxpayer suggesting that the police might report information to CCRA, the CCRA in its letter of October 21 to counsel made no mention of the possible difficulty if the unnamed police force turned out to have an agreement with CCRA. Instead they advised that "based on the circumstances described we consider that the disclosure would be valid as presented", subject of course to "any new details" which might come to light and which could change this determination. By not warning the applicants of this problem whose parameters were knowable by CCRA at that time, and by taking the position later that once such an "agreement" had been found the disclosure would be considered involuntary without need for proof of the taxpayer's knowledge of the existence of that agreement, the CCRA left the applicants with a false sense of security.
[13] I will therefore set aside the decision of August 19, 2004 (confirming the decision of February 18, 2004) on the basis that it is unreasonable, and I will refer the matter back to the respondent with the direction that the disclosures of the applicants be treated as voluntary and assessed in the Voluntary Disclosures Program on that basis.
(s) "Barry L. Strayer"
Deputy Judge
FEDERAL COURT OF CANADA
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-1692-04 and T-1693-04
STYLE OF CAUSE: AASHISH M. KARIA v. MINISTER OF NATIONAL REVENUE
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: April 14, 2005
REASONS FOR ORDER: Strayer D.J.
DATED: May 6, 2005
APPEARANCES:
Clifford L. Rand
Susan Thomson FOR THE APPLICANTS
James Leising
Aleksandra Zemdegs FOR THE RESPONDENT
SOLICITORS OF RECORD:
Stikeman Elliott LLP
Toronto, Ontario FOR THE APPLICANTS
Mr. John H. Sims, Q.C.
Deputy Attorney General of Canada FOR THE RESPONDENT
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