Date: 20060914
Docket: T-2213-05
Citation: 2006 FC 1098
Calgary, Alberta, September 14, 2006
PRESENT: The Honourable Mr. Justice Mosley
BETWEEN:
GREENPIPE
INDUSTRIES LTD.
Applicant
and
THE MINISTER
OF NATIONAL REVENUE
Respondent
REASONS FOR JUDGMENT AND JUDGMENT
[1]
Greenpipe
Industries Ltd. (“Greenpipe”) discovered late that it was entitled to file
claims for tax credits under the Scientific Research and Experimental
Development (SR&ED) program for the 1996, 1997 and 1998 tax years but had
not done so. In 2003 it asked that the respondent accept the filing of amended
T2 returns to include SR&ED claims for those years. The respondent refused
on the ground that the claims were statute barred. Requests for reconsideration
were denied. This is Greenpipe’s application for judicial review of the
respondent Minister’s decision under
the fairness provisions of the Income Tax Act, R.S. 1985, c. 1 (5th
supp.) (the “Act”) dated August 25, 2005.
[2]
In
1995, Greenpipe, a corporation registered in Alberta, entered into
an agreement with Imperial Oil Resources Ltd. (“Imperial”) for development of a
pipeline integrity management computer program. In 1995, the prescribed forms
to make SR&ED claims were filed by the applicant on time and were accepted
by the respondent. Imperial initially funded the work for three years during
which T2 returns were filed by the applicant but the available SR&ED tax
credits with respect to the software development program were not claimed. The
applicant submits that during that period it was believed that Imperial owned
the software copyright and that Greenpipe could not, therefore, claim the
SR&ED credits for those years.
[3]
Imperial
stopped funding Greenpipe in 1999. Greenpipe filed SR&ED claims in relation
to the software for the 1999- 2001 tax years. These were filed on time, audited
and accepted by the respondent.
[4]
In
June 2000, Imperial clarified by letter that it made no claim to ownership of
the software but only to use of the source code, under conditions to be
negotiated with Greenpipe. The applicant thereafter sought a legal opinion
which in December 2000, confirmed that it had the sole ownership of the
copyright in the software. No action was taken immediately to claim the SR&ED
credits for the three years during which they were not claimed. The applicant
asserts that the reason for the delay was that the firm was engaged in another copyright
ownership issue which was not resolved in their favour until September 2002.
[5]
On
August 26, 2003, the applicant requested that the respondent accept the filing
of amended T2 returns to include SR&ED claims for 1996, 1997 and 1998. In
a letter dated September 10, 2003 the respondent disallowed the filing of the
amended T2 returns. In brief, that letter stated that the fairness provisions
of the Act did not permit an adjustment to the filing requirements for a corporate
tax return.
[6]
On
November 20, 2003, the applicant requested that the time limits for filing
SR&ED claims in the Act be waived. Several meetings and further written submissions
followed leading to a third request for waiver by the applicants through
counsel in May 2005. That request was denied by letter dated August 25, 2005.
That letter constitutes the decision which is the subject of these proceedings.
[7]
The
August 25, 2005 letter refers to explanations provided by the respondent in
correspondence dated March 7, 2005. The March 7, 2005 letter outlines the
background to the controversy in some detail and describes the analysis
conducted by the respondent’s officials with respect to the representations
submitted by the applicant on several occasions.
ISSUES
[8]
The
issues can be identified as follows:
1. Did the
respondent err in concluding that the claims in 2003 for the 1996, 1997 and
1998 tax years were barred by operation of the statute?
2. Assuming the
claims were not statute barred, did the respondent fetter his discretion and
fail to consider the applicant’s submissions?
RELEVANT STATUTORY PROVISIONS
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Income Tax Act, R.S. 1985, c. 1 (5th
Supp.)
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Loi de l’impot sur le revenue, L.R. 1985, ch. 1 (5e Suppl.)
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37. (11) Subject to subsection 37(12), no amount in respect
of an expenditure that would be incurred by a taxpayer in a taxation year
that begins after 1995 if this Act were read without reference to subsection
78(4) may be deducted under subsection 37(1) unless the taxpayer files with
the Minister a prescribed form containing prescribed information in respect
of the expenditure on or before the day that is 12 months after the
taxpayer's filing-due date for the year.
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37. (11) Sous réserve
du paragraphe (12), un montant n'est déductible en application du paragraphe
(1) au titre d'une dépense qu'un contribuable engagerait, compte non tenu du
paragraphe 78(4), au cours d'une année d'imposition qui commence après 1995
que s'il présente au ministre, au plus tard douze mois après la date
d'échéance de production qui lui est applicable pour l'année, un formulaire
prescrit contenant les renseignements prescrits relativement à la dépense.
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37. (12) If a taxpayer has not
filed a prescribed form in respect of an expenditure in accordance with
subsection 37(11), for the purposes of this Act, the expenditure is deemed
not to be an expenditure on or in respect of scientific research and
experimental development.
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37. (12) Pour
l'application de la présente loi, la dépense à l'égard de laquelle un
contribuable n'a pas produit un formulaire prescrit en conformité avec le
paragraphe (11) est réputée ne pas être une dépense relative à des activités
de recherche scientifique et de développement expérimental
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152. (1) The Minister shall, with all due dispatch, examine a
taxpayer's return of income for a taxation year, assess the tax for the year,
the interest and penalties, if any, payable and determine
(a)
the amount of refund, if any, to which the taxpayer may be entitled by virtue
of section 129, 131, 132 or 133 for the year; or
(b)
the amount of tax, if any, deemed by subsection 120(2) or (2.2), 122.5(3),
122.51(2), 125.4(3), 125.5(3), 127.1(1), 127.41(3) or 210.2(3) or (4) to be
paid on account of the taxpayer's tax payable under this Part for the year.
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152. (1) Le ministre, avec diligence, examine la
déclaration de revenu d'un contribuable pour une année d'imposition, fixe
l'impôt pour l'année, ainsi que les intérêts et les pénalités éventuels
payables et détermine:
a) le
montant du remboursement éventuel auquel il a droit en vertu des articles 129,
131, 132 ou 133, pour l'année
b) le
montant d'impôt qui est réputé, par les paragraphes 120(2) ou (2.2),
122.5(3), 122.51(2), 125.4(3), 125.5(3), 127.1(1), 127.41(3) ou 210.2(3) ou
(4), avoir été payé au titre de l'impôt payable par le contribuable en vertu
de la présente partie pour l'année.
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152. (4)
The Minister may at any time make an assessment, reassessment or additional
assessment of tax for a taxation year, interest or penalties, if any, payable
under this Part by a taxpayer or notify in writing any person by whom a
return of income for a taxation year has been filed that no tax is payable
for the year, except that an assessment, reassessment or additional
assessment may be made after the taxpayer's normal reassessment period in
respect of the year only if
(a)
the taxpayer or person filing the return
(i)
has made any misrepresentation that is attributable to neglect, carelessness
or wilful default or has committed any fraud in filing the return or in
supplying any information under this Act, or
(ii) has filed with the Minister
a waiver in prescribed form within the normal reassessment period for the
taxpayer in respect of the year; or
(b)
the assessment, reassessment or additional assessment is made before the day
that is 3 years after the end of the normal reassessment period for the
taxpayer in respect of the year and
(i)
is required pursuant to subsection 152(6) or would be so required if the
taxpayer had claimed an amount by filing the prescribed form referred to in
that subsection on or before the day referred to therein,
(ii)
is made as a consequence of the assessment or reassessment pursuant to this
paragraph or subsection 152(6) of tax payable by another taxpayer,
[…]
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152.
(4) Le ministre peut établir une cotisation, une nouvelle cotisation ou une
cotisation supplémentaire concernant l'impôt pour une année d'imposition,
ainsi que les intérêts ou les pénalités, qui sont payables par un
contribuable en vertu de la présente partie ou donner avis par écrit qu'aucun
impôt n'est payable pour l'année à toute personne qui a produit une
déclaration de revenu pour une année d'imposition. Pareille cotisation ne
peut être établie après l'expiration de la période normale de nouvelle
cotisation applicable au contribuable pour l'année que dans les cas suivants:
a) le
contribuable ou la personne produisant la déclaration:
(i) soit a fait
une présentation erronée des faits, par négligence, inattention ou omission
volontaire, ou a commis quelque fraude en produisant la déclaration ou en
fournissant quelque renseignement sous le régime de la présente loi,
(ii) soit a
présenté au ministre une renonciation, selon le formulaire prescrit, au cours
de la période normale de nouvelle cotisation applicable au contribuable pour
l'année;
b) la
cotisation est établie avant le jour qui suit de trois ans la fin de la
période normale de nouvelle cotisation applicable au contribuable pour
l'année et, selon le cas:
(i) est à établir
en conformité au paragraphe (6) ou le serait si le contribuable avait déduit
un montant en présentant le formulaire prescrit visé à ce paragraphe au plus
tard le jour qui y est mentionné,
(ii) est établie
par suite de l'établissement, en application du présent paragraphe ou du
paragraphe (6), d'une cotisation ou d'une nouvelle cotisation concernant
l'impôt payable par un autre contribuable,
[…]
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152. (4.3) Notwithstanding subsections 152(4), 152(4.1) and
152(5), where the result of an assessment or a decision on an appeal is to
change a particular balance of a taxpayer for a particular taxation year, the
Minister may, or where the taxpayer so requests in writing, shall, before the
later of the expiration of the normal reassessment period in respect of a
subsequent taxation year and the end of the day that is one year after the
day on which all rights of objection and appeal expire or are determined in
respect of the particular year, reassess the tax, interest or penalties
payable, or redetermine an amount deemed to have been paid or to have been an
overpayment, under this Part by the taxpayer in respect of the subsequent
taxation year, but only to the extent that the reassessment or
redetermination can reasonably be considered to relate to the change in the
particular balance of the taxpayer for the particular year.
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220. (2.1) Where any
provision of this Act or a regulation requires a person to file a prescribed
form, receipt or other document, or to provide prescribed information, the
Minister may waive the requirement, but the person shall provide the document
or information at the Minister's request.
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220. (2.1) Le ministre
peut renoncer à exiger qu'une personne produise un formulaire prescrit, un
reçu ou autre document ou fournisse des renseignements prescrits, aux termes
d'une disposition de la présente loi ou de son règlement d'application. La
personne est néanmoins tenue de fournir le document ou les renseignements à
la demande du ministre.
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220. (3) The Minister may
at any time extend the time for making a return under this Act. However, the
extension does not apply for the purpose of calculating a penalty that a
person is liable to pay under section 162 if the person fails to make the
return within the period of the extension.
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ANALYSIS
Standard of Review
[9]
The
parties agree that the applicable standard of review to decisions taken under
the fairness provisions of the Act is reasonableness: Lanno v. Canada (Customs and Revenue
Agency),
2005 D.T.C. 5245, 2005 FCA 153. In light of the Court of Appeal’s application
of a pragmatic and functional analysis in that decision, I see no reason to
repeat the exercise. In so far as this matter concerns a fairness decision, I
accept that the standard of review should be one of reasonableness.
[10]
As
stated by Justice Iacobucci in Canada (Director of
Investigation and Research) v. Southam, [1997] 1 S.C.R. 748 at para.
56, “an unreasonable decision is one that, in the main, is not supported by any
reasons that can stand up to a somewhat probing examination. Accordingly, a
court reviewing a conclusion on the reasonableness standard must look to see
whether any reasons support it.”
[11]
My
colleague Justice Sean Harrington discussed the reasonableness standard in Maloshicky
v. Canada (Customs and Revenue
Agency),
[2005]
F.C.J.
No.1203 (QL), 2005 FC 978 at para. 10, a case also arising under the fairness
provisions of the Income Tax Act, as follows:
…A
reasonable decision is not necessarily a correct decision. There can be more
than one reasonable decision. It does not matter whether or not I would have
made the same decision. The reasonableness standard means that the decision
should not be interfered with unless clearly wrong in the sense of being based
on a wrong principle or a misapprehension of the facts. [Citations excluded]
[12]
The
first issue to be determined is whether the respondent erred in concluding that
the claims were statute barred. That is a question of law which calls for
review on the standard of correctness: Barrie Public Utilities v. Canadian Cable
Television Assn., [2003] 1 S.C.R. 476, 2003
SCC 28 at para. 66; Mugesera v. Canada (Minister of Citizenship and
Immigration),
[2005] 2 S.C.R. 100, 2005 SCC 40 at para. 37.
Are the claims statute
barred?
[13]
The
respondent's position is that section 37 (11) and paragraph 127 (9)(m) of the
Act provide that no amounts may be allowed for SR&ED expenditures and
investment tax credits, unless prescribed forms for such claims are filed
within one year after the taxpayer's filing due date for the particular year.
In the case of the applicant, this deadline was eighteen months after each
taxation year ended. Section 220 of the Act allows the Minister to accept late
filed forms, but it does not provide the Minister with authority to reassess
tax years otherwise precluded by section 152 (4) of the Act. Refunds for
refundable investment tax credits are made pursuant to section 164 of the Act,
and require the minister to make an assessment or reassessment.
[14]
The
applicant submits that this is not a case of assessment or reassessment of the
1996, 1997 and 1998 taxation years but rather a request to determine
under paragraph 152 (1) (b) of the Act the amount of tax deemed by subsection
127.1 (1) to be paid on account of the taxpayer's tax payable under Part l of
the act for SR&ED claims for those years where the applicant was unsure of
its entitlement and as a consequence did not apply for the refund.
[15]
There
is no reference, the applicant submits, in subsection 152 (4) to any time limit
to “determine” or to “re-determine”. Once any amount is determined under
paragraph 152(1)(b) of the Act, the amount of tax deemed by subsection 127.1(1)
to be paid on account of the taxpayer's tax payable under part one of the Act
for the year may give rise to a change in taxable income for subsequent years
which the respondent may reassess under subsection 152 (4.3) of the Act.
[16]
The
applicant cites Alex Parallel Computers Research Inc. v. Canada (1998),
157 FTR 247 (F.C.), [1998] F.C.J. No. 1742 (QL) (Alex Parallel) for the
proposition that the Minister may waive the filing of any form required by the
Act, including the forms prescribed for the filing of a SR&ED claim. Alex
Parallel is a case involving the interpretation of subsection 220 (2.1) of
the Act. The respondent had taken the position that the section applied only to
electronic filing. Justice Yvon Pinard concluded that the Minister’s
discretion under the section was not limited to such filings.
[17]
In
my view, Alex Parallel is not of assistance to the applicant as the
parties in that case had reached an agreement to deduct research expenditures
from the taxpayer's taxable income upon the filing of supporting information by
a certain date. The taxpayer was one month late in filing. It is clear from
the decision that the tax year was "open" in the sense that the tax
owing for that year was being reassessed pursuant to an audit. In this case,
there was no audit and no reassessment.
[18]
The
applicant’s argument that what is sought is neither an assessment nor
reassessment but a determination is novel but not persuasive. It is clear that
section 37 of the Act permits the deduction of an expenditure made by the
taxpayer in the year, or a preceding year, on scientific research and
experimental development from the taxpayer's taxable income. The object is to
reduce the taxable income and hence the tax payable on that income. To obtain
the benefit of that reduction, the taxpayer is required by subsection 37 (11)
to file the prescribed forms within 12 months of the taxpayer's filing
deadline. Failing that, the taxpayer's income is calculated without the
deduction and the tax payable is assessed. Any recalculation of the income and
tax payable, in my view, requires a reassessment. The Minister may at any time
make an assessment, reassessment or additional assessment for a taxation year
pursuant to subsection 152(4), subject to the limitations set out therein. The
enactment does not provide for the redetermination of the taxpayer's taxable income
in any given year absent such an assessment.
[19]
I
conclude, therefore, that the respondent's decision was correct and that the
Minister had no discretion under the statute to waive the filing requirements
and reassess the applicant’s taxable income for the 1996, 1997 and 1998
taxation years. In the event that I am wrong in finding that the Minister
lacked such discretion, I will proceed to consider whether the Minister
exercised it fairly.
Did the respondent
fetter his discretion and fail to consider the applicant’s submissions?
[20]
The
applicant submits that in the September 10, 2003 decision letter responding to
the initial request to amend the previously filed returns, the respondent
fettered his discretion by treating internal guidelines as binding and
excluding other valid or relevant reasons for the exercise of his discretion.
[21]
The
September 10, 2003 letter referred to the fairness provisions of the Income Tax
Act and stated that the legislation allowed for an adjustment of penalties and/or
interest charges where extraordinary circumstances such as a natural disaster
or a serious illness have prevented compliance by the taxpayer or the charges
arose because of actions of the Revenue Agency. This was a reference to
guidelines adopted by the respondent and not to any legislative criteria.
[22]
Similar
guidelines considered in the respondent’s fairness review process were addressed
by the Court in Dorothea Knitting
Mills Ltd. v. Canada (M.N.R.), 2005
D.T.C. 5177 (F.C.), 2005 FC 218 (Dorothea) at para. 8. In that case, the
Minister had taken the position that an extension of time would be granted,
pursuant to subsection 220(2.1) of the Act, where one of three criteria are
met: that there were “extenuating circumstances”, that the applicant had taken
“reasonable steps” to comply with the law or that the applicant “acted on
incorrect written information given by the Agency”.
[23]
In Dorothea, the taxpayer
had filed the prescribed form for a SR&ED claim within the 18 months time
limit but submitted the supporting technical documentation three months late.
The Court concluded that in considering the request for an extension of time
the Minister's delegate had elevated the guideline criteria to the level of
determinative factors and had not considered the arguments put forward by the
applicant. While it was open to the delegate to consider the arguments,
and to accept or reject them, it was not open to the delegate to refuse the
request simply because it did not meet criteria that have no foundation in the
enabling legislation.
[24]
That is not what happened in this
case. While the September 10, 2003 letter might lead one to the conclusion
that the respondent had fettered his discretion by confining his consideration
of the request to whether there were extraordinary circumstances, as described,
that was neither the beginning nor the end of the matter. The September 10,
2003 letter was precipitated by the applicant's request of August 26, 2003 to
amend its previous filings. That request contained no submissions which could
have justified a fairness determination by the Minister. It appears from the
record that submissions were put forward subsequently in a series of meetings
and exchanges of correspondence between the applicant’s representatives and the
respondent’s staff. In any event, the September 10, 2003 letter is not the
decision under review.
[25]
The key document, in my view, is
the respondent's 11 page letter of March 7, 2005 which sets out the applicant's
case in support of a waiver and the respondent's analysis of those submissions.
That analysis was not limited in scope to the type of extraordinary
circumstances cited in the September 10, 2003 letter or the extenuating factors
referred to in Dorothea. The March 7, 2005 letter demonstrates that the
Minister did not close his mind to the arguments put forward by the applicant
but considered them fully. I see nothing in the subsequent letter from
applicant's counsel dated May 24, 2005 that would have required further
consideration by the Minister. The respondent’s reply dated August 25, 2005,
containing the decision under review, refers back to the detailed analysis
contained in the March 7, 2005 letter and the rationale provided for denying
the request for a waiver and extension of time. In these proceedings, the
applicant has been unable to identify any significant factor advanced on its
behalf that was not considered by the respondent in arriving at his decision.
[26]
It is regrettable that the
applicant has been unable to take advantage of the credits to which it would
have been entitled had the ownership issue been resolved in its favour earlier and
the prescribed forms and supporting documentation filed within time. However, the Court’s task is not to determine whether the decision to deny
a waiver of the filing requirement for the 1996, 1997 and 1998 SR&ED claims
was fair to the applicant but rather whether it was a reasonable decision applying
the standard of review described above. On the record before me, there are no
grounds upon which I could conclude that the decision was based on the
application of the wrong principles or from a misapprehension of the facts, or,
is unsupported by any reasons that can stand up to a somewhat probing
examination. The application will therefore be dismissed.
[27]
Considering that the public purse
has benefited considerably from these events, the Court shall exercise its
discretion to make no order as to costs.
JUDG M ENT
IT IS ORDERED AND
ADJUDGED
that the application is dismissed. No order is made as to costs.
“Richard
G. Mosley”
FEDERAL COURT
SOLICITORS OF RECORD
DOCKET: T-2213-05
STYLE OF CAUSE: Greenpipe
Industries Ltd. v. MNR
PLACE OF
HEARING: Calgary, Alberta
DATE OF
HEARING: September
12, 2006
REASONS FOR JUDGMENT
AND JUDGMENT: MOSLEY J.
DATED: September
14, 2006
APPEARANCES:
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Mr. James
Dunphy
Ms. Bianca
Kratt
Mr. David
Besler
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FOR THE APPLICANT
FOR THE RESPONDENT
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SOLICITORS
OF RECORD:
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Warren
Tettensor Amantea LLP
Calgary, Alberta
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FOR THE APPLICANT
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John H. Sims,
Q.C.
Deputy
Attorney General of Canada
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FOR THE RESPONDENT
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