Bugera v. Canada (Minister of National Revenue), 2003 FCT 392

Date: 20030402

Docket: T-113-02

Citation: 2003 FCT 392

Ottawa, Ontario, Wednesday, the 2^nd day of April, 2003

Present:           THE HONOURABLE MADAM JUSTICE DAWSON

BETWEEN:

                                                  STEVE BUGERA, ROSE BUGERA,

                                               GERALD BUGERA, ALLAN BUGERA

                                                               AND GAIL MCLEOD

                                                                                                                                                      Applicants

                                                                              - and -

                                               MINISTER OF NATIONAL REVENUE

                                                                                                                                                   Respondent

                                               REASONS FOR ORDER AND ORDER

[1]                 The applicants are taxpayers who, in this application for judicial review, challenge the December 24, 2001 decision of the Minister of National Revenue's delegate not to allow the late filing of several elections under the Income Tax Act, R.S.C. 1985, c.1 (5^th Supp.)("Act").

BACKGROUND FACTS

[2]                 The applicants Steve and Rose Bugera are the parents of five adult children, three of whom are also applicants in this application for judicial review. Together, the family owned and operated a pub in Kelowna. They did so through a corporation known as Zodiac Pub Ltd. ("Zodiac").

[3]                 A corporate reorganization of Zodiac was accomplished by an estate freeze and, later, a thaw. The estate freeze took place in 1992, when the parents retained their preferred shares in the company and transferred the common shares and ownership to the five adult children. The estate thaw took place in 1994 when the five children gave up their common shares for preferred class of shares, and the parents resumed control of the company by acquiring the common shares. The estate freeze took place in order to allow the future equity in Zodiac to be accumulated in the names of the five children, and in order to allow Mr. and Mrs. Bugera Sr. to take advantage of the enhanced capital gain exemption which was then available from the sale of shares of a qualified small business corporation. The thaw took place in order to facilitate the crystallization of capital gains which had accrued with respect to the shares owned by the Bugera children.

[4]                 At the time of the estate thaw, Mr. Bugera Sr. received a letter from the family's solicitors which advised that elections pursuant to section 85 of the Act had to be filed within a specified time, and that counsel was relying on the Bugera family tax advisor to file the elections. The applicants say that the tax advisor undertook to file the appropriate elections within the prescribed time limit. However, the tax advisor did not file the elections on time or at all. The Bugera family say they were unaware of this omission and that the omission did not come to light until the time for filing elections had passed.

[5]                 In June 1997, the Bugera family sold their shares in Zodiac to an arm's-length third party. They say they would not have sold the company had they known that the section 85 elections had not been filed.

[6]                 In the fall of 1997, the family's new accountant informed Mr. Bugera Sr. that the section 85 elections had not been filed on time in respect of both the 1992 and 1994 share reorganizations within Zodiac. The accountant then assembled the information necessary for Revenue Canada to review the matter.

[7]                 On December 1, 1997, the accountant advised Mr. Bugera and his family to pay the estimated penalties, interest and income taxes to Revenue Canada so that interest would cease to accrue and to demonstrate good faith. That month, Mr. Bugera Sr. paid to Revenue Canada Taxation $455,000.00 in order to deal with his own, and his family's, respective tax liabilities.

[8]                 Also in December 1997, the accountant made voluntary disclosure to Revenue Canada on behalf of the family.

[9]                 Revenue Canada appears to have had difficulty in processing the payments made by Mr. Bugera Sr. The family accountant received statements of account from Revenue Canada which indicated that it had allocated the payments to the respective 1997 installment accounts of Mr. Bugera and his family. When the accountant called Revenue Canada to advise of this error, he was apparently informed that Revenue Canada's computer system did not have the programming capability to allocate and account for payments made in respect of liabilities that had yet to be assessed.

[10]            After further information was provided to Revenue Canada and further communication took place between the family's professional advisors and Revenue Canada, a formal request for a positive exercise of discretion pursuant to subsection 85(7.1) of the Act was made. After consideration, the delegate of the Minister of National Revenue advised that he declined to exercise his discretion to permit the filing of late elections. This application for judicial review is in respect of that decision.

THE DECISION OF THE MINISTER'S DELEGATE

[11]            The letter which communicated the delegate's decision was brief, and was as follows:

Your letter of November 14^th seeking the favour of the Minister to allow the filing of several section 85 elections beyond the three-year time limitation pursuant to the provisions of subsection 85(7.1) of the Income Tax Act (the "Act") has been given careful consideration by this office.

The elections pertain to a share reorganization of Zodiac Pub Ltd., undertaken in 1992 and 1994 by seven individual members of the Bugera family (your "clients"). We comment on your request as follows.

Decisions made in subsequent taxation years by some of those clients to invest in securities that created CNIL balances were made on the advice of the professional advisors. Your clients are ultimately responsible for their own decisions. This request would have been unnecessary in the absence of these investment activities.

The request to amend some twenty-five income tax returns of your clients made in 1998 were not "voluntary disclosures" as contemplated by our Information Circular IC 85-1R2 and were not accepted as such. The amendment requests were referred to Audit. Proper elections pertaining to the share reorganization have never been filed by your clients and none of the monies paid on account were ever identified to pay penalties for late filed section 85 elections.

In the end, Audit disallowed the amendments that pertained to the reorganization and application of section 85. Absent valid elections, there was no gain to report by any of your clients in 1992 or 1994 from the reorganization as there was no non-share consideration involved. The tax treatment on share for share exchanges is deferred until the exchanged shares are ultimately disposed which, in this case, was 1997.

You have argued that the failure by your clients in not filing the proper elections on time were inadvertent errors. However, there was nothing inadvertent about the actions taken in this sophisticated tax planning effort. It would appear that the filing errors were attributable to negligence or carelessness rather than inadvertence.

For those reasons, it is my opinion that it would not be just or equitable to grant your client's requests pursuant to the provisions of subsection 85(7.1) of the Act.

THE ISSUES

[12]            Three errors are asserted on this application for judicial review. They are:

1.          The Minister's delegate erred in law in deciding that it was a prerequisite to the exercise of discretion under subsection 85(7.1) of the Act that the applicants file their elections and pay estimates of the penalties in respect of the elections.

2.          The delegate based his decision on erroneous findings of fact when he determined that the applicants had not filed proper elections and had not paid estimated penalties. (The Minister did not pursue on this application for judicial review the assertion that the applicants had not made voluntary disclosure. Accordingly, this is not at issue.)

3.          The Minister's delegate acted beyond his jurisdiction by taking into account irrelevant considerations, specifically that some of the applicants invested in securities that created cumulative net investment loss ("CNIL") balances.

THE LEGISLATION

[13]            Subsection 85(7.1) of the Act which conferred the discretion upon the Minister to allow the late filing of elections is as follows:

THE STANDARD OF REVIEW

[14]            Wide discretion is conferred on the Minister by subsection 85(7.1) of the Act. On an application for judicial review the Court may not exercise the discretion given to the Minister. Rather, the Court may only intervene and set aside the discretionary decision under review if the decision was made in bad faith, or without regard to material facts, or on the basis of irrelevant facts, or if the decision was contrary to law. See: Barron v. Minister of National Revenue (1997), 209 N.R. 392; (application for leave to appeal dismissed July 10, 1997 [1997] S.C.C.A. No. 207).

ANALYSIS

1.          Did the Minister's delegate err in law in deciding that it was a prerequisite to the exercise of discretion that the applicants must file elections and pay estimates of the penalties in respect of the elections?

[15]            The applicants say that in declining to allow them to file late elections, the delegate indicated that he was of the opinion that it was a prerequisite to the exercise of his discretion that proper elections be filed and an estimate of penalties be paid. The applicants further say that the delegate must first exercise his discretion to permit the elections, and once that permission has been granted the taxpayer may then take advantage of that permission and file proper elections and pay the estimated penalties.

[16]            In support of that argument, the applicants say that had Parliament intended for the elections and payments to be a prerequisite for an exercise of discretion, Parliament would have used explicit words to that effect in subsection 85(7.1). The applicants note that in Information Circular 76-19R3 the Minister has established a guideline that says late elections "should" accompany a written request to the Minister along with payment of an estimate of the applicable penalties. The applicants say, however, that the content of any policy must be within the scope of the power bestowed by the enabling legislation. In support of this argument, they rely upon the decision of Mr. Justice Rouleau in Boyko v. Canada (Minister of Agriculture) (2000), 191 F.T.R. 6 (T.D.), at paragraph 13. The applicants say that in this case, the policy of requiring a late-filed election and payment of an estimate of penalties, prior to consideration under subsection 85(7.1), contradicts the Act and falls outside of the power bestowed upon the Minister.

[17]            With respect to Information Circular 76-19R3, entitled "Transfer of Property to a Corporation Under Section 85", provisions of relevance to this application are found in paragraphs 15 and 21, which deal with filing late elections. They provide:

Late and Amended Elections

15. Under subsection 85(7), you can make an election up to three years after the filing deadline referred to in paragraph 12. Subsection 85(7.1) provides that you can file an election more than three years after the original due date, or amend an election at any time if, in the opinion of the Minister, the circumstances giving rise to the late or amended election are just and equitable. The Minister delegates the authority to accept these late and amended elections to the directors of tax services offices. You or your representative should file a late or amended election, provided under subsection 85(7.1), at the transferor's tax services office, together with a written request to the Minister to accept the election. The request should provide the reasons why you consider that it is just and equitable to accept the election. If you do not include these reasons, the Department will not process the election. You also have to pay an estimate of the applicable penalty when making the election (refer to paragraph 21).

[...]

Penalty for Late and Amended Elections

21. The Department does not accept an amended or late-filed election made under subsection 85(7) or (7.1), unless the transferor calculates and pays the estimated penalty when filing the election. We will subsequently determine and assess the balance of the penalty the transferor has to pay without delay. [Underlining added]

[18]            Also of relevance is Information Circular 92-1, entitled "Guidelines for accepting Late, Amended or Revoked Elections". Relevant provisions are paragraphs 3, 10, 11 and 16, which are as follows:

3. These are only guidelines. They are not intended to be exhaustive, and are not meant to restrict the spirit or intent of the legislation. As the Department gains experience in applying the legislation, these guidelines may be adjusted, as necessary.

[...]

10. A request may be accepted in the following situations:

(a) There have been tax consequences not intended by the taxpayer, and there is evidence that the taxpayer took reasonable steps to comply with the law. This could include, for example, the situation where the taxpayer obtained a bona fide valuation for a property, but after the Department's review the valuation was found to be incorrect.

(b) The request arises from circumstances that are clearly beyond the taxpayer's control. Such extraordinary circumstances could include natural or man-made disasters such as flood or fire, civil disturbances or disruptions in services, such as a postal strike, a serious illness or accident, or serious emotional or mental distress such as death in the immediate family.

(c) It is evident that the taxpayer acted on incorrect information given by the Department. This could include incorrect written replies to queries and errors in departmental publications.

(d) The request results from what is clearly a mechanical error. This could include using the net book value amount when obviously the taxpayer intended to use the undepreciated capital cost, or using an incorrect cost.

(e) The subsequent accounting of the transactions by all parties is as if the election had been made, or had been made in a particular manner.

(f) The taxpayer can demonstrate that he or she was not aware of the election provision, even though the taxpayer took a reasonable amount of care to comply with the law, and undertook remedial action as quickly as possible.

11. A request will not be accepted in the following instances:

(a) It is reasonable to conclude that the taxpayer made the request for retroactive tax planning purposes. This could include taking advantage of changes to the law enacted after the due date of the election.

(b) Adequate records do not exist to verify whether or not the request can be accepted.

(c) It is reasonable to conclude that the taxpayer had to make the request because he or she was negligent or careless in complying with the law.

[...]

16. When the request involves more than one taxpayer, an agreement, signed by all parties, to the changes requested should be included with the request.

                                                                                                                         [Underlining added]

[19]            Turning to the applicants' arguments, I am not satisfied on the evidence that the Minister's delegate viewed the filing of properly signed elections and the payment of properly identified monies towards penalties to be prerequisites to the exercise of his discretion. Had the delegate considered these to be true prerequisites, the request would not have been processed.

[20]            I am satisfied on the basis of the Minister's delegate's reasons that the Minister's delegate did have regard to the absence of properly signed elections and properly identified payments when assessing the whole of the request on its merits. While I will deal below with whether there was a basis on the evidence for the Minister's delegate's conclusions, I am satisfied that as a matter of law regard to these factors is relevant and permissible.

[21]            In this regard, the Minister may formulate general policy guidelines, as was done in Information Circulars 92-1 and 76-19R3, in order to facilitate the consistent exercise of discretion. Those guidelines require that normally late elections should be filed together with a written request for the exercise of a subsection 85(7.1) discretion, and that an estimate of the applicable penalties must be paid at the time. Thus, to the extent the information circulars are valid guidelines, it was relevant for the Minister's delegate to have regard to whether elections were filed and whether a properly identified estimate of the penalties were paid.

[22]            The applicants argue that the guidelines must be in accordance with the intent of the legislation and that Information Circular 76-19R3 offends that intent. The applicants say that the intent of the legislation is to require the filing of forms and payment of penalties after the Minister positively exercises his discretion, and not before, as is provided for in the respondent's guidelines.

[23]            Having carefully reviewed subsection 85(7.1) of the Act, I have not been persuaded that the guidelines were formulated in bad faith, or with regard to irrelevant considerations or purposes extraneous to the intent of the legislation. Nothing in the wording used in subsection 85(7.1) of the Act leads me to conclude that Parliament's intent is thwarted if persons who seek the Minister's favourable exercise of discretion are generally required to accompany their request with a properly completed election and are required to pay a properly identified estimate of the penalty owing in respect of the requested election.

[24]            Subsection (7.1) provides that where in the opinion of the Minister it is just and equitable to permit a late election, the election shall be deemed to have been made on a timely basis, if the election is made in prescribed form and an estimate of penalties is paid when the election is made. Requiring a taxpayer to make his or her election and pay the estimated penalties pending the opinion of the Minister is consistent with the wording of subsection (7.1). After these two things have been done it is for the Minister to consider whether it is just and equitable to permit or give effect to the making of a late election.

2.          Did the delegate base his decision on erroneous findings of fact?

[25]            In the refusal letter the Minister's delegate stated:

Proper elections pertaining to the share reorganization have never been filed by your clients and none of the monies paid on account were ever identified to pay penalties for late filed section 85 elections.

[26]            The applicants argue that these conclusions are capricious because:

(i)          As the Minister's delegate noted in his affidavit filed in opposition to this proceeding, duly signed section 85 elections were filed by Steve and Rose Bugera, but not by the Bugera children. Unsigned elections were delivered on their behalf.

(ii)         With respect to the payments, the evidence is uncontradicted that in December 1997, the applicant Steve Bugera paid the respondent $455,000.00.

[27]            Dealing with the first asserted capricious finding of fact, without doubt five of the seven taxpayers failed to sign the elections proffered to the Minister. Information Circular 92-1 is express at paragraph 16 that when a request involves more than one taxpayer, an agreement signed by all the parties to the changes requested "should" be included with the request for the exercise of discretion. It was not unreasonable to note the absence of signed elections for all of the affected taxpayers.

[28]            As to the second capricious finding of fact, there is no evidence that when the monies were paid to Revenue Canada they were designated as being in respect of estimated penalties. The only evidence with respect to the payment is that cheques were hand-delivered to Revenue Canada in respect of each taxpayer. There is no evidence that any covering explanation or correspondence accompanied the payment. When it became apparent that Revenue Canada had processed the payments to the taxpayers' current installment accounts, their accountant contacted Revenue Canada and was informed that the computer system did not have the programming capabilities to allocate payments in respect of liabilities which had not yet been assessed. There is no evidence as to what thereafter the taxpayers or their professional advisors did. This evidence does not establish that the payments were made in the way one would normally expect.

[29]            On this evidentiary record, I do not find the Minister's delegate's findings that proper elections were not filed by the children and that "none of the monies paid on account were ever identified to pay penalties for late filed section 85 elections" were patently unreasonable. The decision letter did not say the payments were not made. It referred only to the failure to identify payments made as relating to late filed elections.

[30]            Even if I am wrong in my conclusion, and the Minister's delegate ought not to have considered these factors, I do not consider these findings to have been material to the decision. In my view, the substantial bases for the decision were the Minister's delegate's conclusions with respect to retroactive tax planning and that the elections were not filed due to neglect or carelessness. Therefore, because any error with respect to the filing of elections and the payment of estimated penalties was not in my view material, in the exercise of my discretion I would not allow the application for judicial review on this ground. See: Patel v. Canada (Minister v. Citizenship and Immigration) (2002), 288 N.R. 48 (F.C.A.).

3.          Did the delegate exceed his jurisdiction by taking into account irrelevant considerations?

[31]            It is not disputed that in the 1994 through 1997 taxation years many of the applicants invested in speculative limited partnership tax shelters that affected their CNIL balances and thus their available capital gains deductions. The Minister's delegate looked to the fact that if those investments had not been made, the applicants would not have needed to file section 85 elections. He therefore concluded that filing the requests constituted retroactive tax planning.

[32]            The applicants say that their conduct cannot constitute retroactive tax planning because the evidence is uncontradicted that they had no idea that the elections had not been filed until after the tax shelter investments had been made. They say that in the absence of evidence that the applicants knew the elections had not been filed, their late filing requests cannot be construed to be retroactive tax planning.

[33]            I disagree. It is conceded by the parties that, but for the investment transactions which led to the CNIL balances, the effect of the requested elections would be detrimental to the interests of most of the taxpayers. Having accumulated those balances, and then learning of the previous failure to file elections (which are the facts which the taxpayers assert) the taxpayers were faced with the choice of whether to seek to file late elections or to take the situation as it was. On those facts, it was in my view open to the Minister's delegate to characterize the situation to be retroactive tax planning. But for the subsequent events, it was no longer in the taxpayers' interest to proceed as they originally intended. This may be said to be retroactive tax planning and the Minister's delegate's conclusion was not patently unreasonable.

4.          Other Matters

[34]            The applicants also complain that the Minister's delegate improperly considered as a ground of refusal that, if allowed, the elections would result in an increase in income to statute-barred years, and that the Minister's delegate erred in finding the elections were not filed due to negligence or carelessness.

[35]            I am not persuaded by either submission.

[36]            On the first point, the refusal letter expressly set forth the reasons upon which the decision was based and made no reference to statute-barred years. While the Minister's delegate referred to this ground in his affidavit, I give it little weight. Given the express statement in the refusal letter that it listed the reasons for the decision, the Minister's delegate's decision should, in my view, be considered on the basis of the reasons given at the time by the delegate.

[37]            As to whether it was patently unreasonable for the Minister's delegate to conclude that the filing errors were attributable to negligence or carelessness, the estate freeze and thaw transactions constituted relatively sophisticated tax planning which was not properly completed. Mr. Bugera swore that the applicants simply assumed that the elections were properly filed within time. Thereafter, the taxpayers signed tax returns which did not report either the gain or the intended exemption on the share exchanges.

[38]            It was not, in my view, patently unreasonable for the Minister's delegate to characterize the failure to file proper section 85 elections as arising from negligence or carelessness. That conclusion was reasonably open on the evidence.

CONCLUSION

[39]            For these reasons, the application for judicial review will be dismissed. No factors have been cited as to why costs, as requested by the applicants, should not follow the event.

                                                  ORDER

[40]            IT IS HEREBY ORDERED THAT:

1.          The application for judicial review is dismissed.

2.          The applicants shall pay to the respondent one set of costs, to be assessed as contemplated by Rule 407 of the Federal Court Rules, 1998.

"Eleanor R. Dawson"

Judge

                          FEDERAL COURT OF CANADA

                                       TRIAL DIVISION

    NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:       T-113-02

STYLE OF CAUSE: Steve Bugera, et al v. MNR

PLACE OF HEARING:         Kelowna, British Columbia

DATE OF HEARING:           March 13, 2003

REASONS FOR ORDER AND ORDER :             The Honourable E. R. Dawson

DATED:          April 2, 2003

APPEARANCES:

Mr. Robert E. Groves                                           FOR APPLICANTS

Ms. Karen A. Truscott                           FOR RESPONDENT

SOLICITORS OF RECORD:

Berge Horn                                                       FOR APPLICANTS

Kelowna, British Columbia

Morris Rosenberg                                                 FOR RESPONDENT

Attorney General for Canada