Date: 20040415
Docket: T-553-02
Citation: 2004 FC 560
Ottawa, Ontario this 15th day of April, 2004
Present: THE HONOURABLE MR. JUSTICE von FINCKENSTEIN
BETWEEN:
THE NAIL CENTRE AND ESTHETICS SALON
Applicant
and
CANADA CUSTOMS AND REVENUE AGENCY
Respondent
REASONS FOR ORDER AND ORDER
[1] These are four related cases that were heard together in Toronto. The Respondent, the Minister of National Revenue, as represented by the Director of the Toronto West Tax Services Office, chose not to exercise his discretion to waive interest and penalties in respect of:
- an outstanding GST debt payable by An Dell Electric Ltd (An-Dell) in the amount of $57,033.64 (file T-638-02);
- an outstanding GST debt payable by the Nail Centre and Esthetics Salon (Nail Centre) in the amount of $16,998 (file T-553-02);
- an income tax debt payable by George Vitellaro in the amount of $124,879.46 (file T-632-02); or
- in respect of an income tax debt payable by Beate Vitellaro in the amount of $41,805.10 (file T-633-02).
The total amount of outstanding interest and penalties in respect of the four debts is $181,683.73.
[2] George and Beate Vitellaro are the sole owners of An-Dell and the Nail Centre. Since the fairness hearings focussed largely on the ability of George and Beate Vitellaro and their businesses to pay their tax debts, these cases were tried together. The same designated officer of the Canada Customs and Revenue Agency (CCRA), now Canada Revenue Agency, Debbie Montgomerie, provided affidavit evidence explaining the background for the fairness rulings.
[3] The authority for making fairness rulings can be found in both the Excise Tax Act, R.S. 1985, c. E-15 and the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.). Under both authorities Guidelines have been issued that specify how the discretion granted by the fairness provisions should be exercised. The relevant legislative provisions and guidelines provide as follows:
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Waiving or cancelling interest
281.1 (1) The Minister may waive or cancel interest payable by a person under section 280.
Waiving or cancelling penalties
(2) The Minister may waive or cancel penalties payable by a person under section 280.
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Renonciation ou annulation - intérêts
281.1 (1) Le ministre peut annuler les intérêts payables par une personne en application de l'article 280, ou y renoncer.
Renonciation ou annulation - pénalités
(2) Le ministre peut annuler la pénalité payable par une personne en application de l'article 280, ou y renoncer.
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| Waiver of penalty or interest
220 (3.1) The Minister may at any time waive or cancel all or any portion of any penalty or interest otherwise payable under this Act by a taxpayer or partnership and, notwithstanding subsections 152(4) to 152(5), such assessment of the interest and penalties payable by the taxpayer or partnership shall be made as is necessary to take into account the cancellation of the penalty or interest.
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Renonciation aux pénalités et aux intérêts
220 (3.1) Le ministre peut, à tout moment, renoncer à tout ou partie de quelque pénalité ou intérêt payable par ailleurs par un contribuable ou une société de personnes en application de la présente loi, 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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GST Memorandum 500-3-2-1, Cancellation or Waiver of Penalties and Interests
| 8. It may be appropriate for the Department, in circumstances where there is an inability on the part of the person to pay amounts owing, to consider cancelling or waiving penalties and interest in whole or in part to facilitate collection. For example:
(a) when collection has been suspended due to an inability to pay;
(b) when a person is unable to conclude a reasonable payment arrangement because the penalty and interest charges represent a significant portion of the payments. In such cases, consideration may be given to waiving penalties and interest in whole or in part for the period beginning on the first payment due date under the payment arrangement until the amounts owing are paid, provided the agreed payments are made on time.
9. Where an extraordinary circumstance beyond the person's control has prevented the person from complying with the Act, the following factors will be considered by the Department to determine whether or not penalties and interest will be cancelled or waived:
(a) Does the person have a satisfactory history of voluntary compliance (i.e., have previous GST returns been filed and payments made on time)?
(b) Has the person knowingly allowed an outstanding balance to exist upon which the penalties and interest have accrued?
(c) Has the person acted quickly to remedy the omission or the delay in compliance, which originally resulted in penalties and interest being charged?
(d) Is there evidence that the person exercised reasonable care and diligence (e.g., planned for anticipated disruptions) and was not negligent or careless in the conduct of its affairs? The onus is on the registrant to keep abreast of any new developments in the administration of the GST so as to ensure continuing compliance.
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8. Dans les situations où il y a incapacité de la part de la personne de verser les montants dus, il peut être indiqué pour le Ministère d'examiner la possibilité d'annuler la totalité ou une partie des pénalités et des intérêts, ou d'y renoncer, afin d'en faciliter le recouvrement, par exemple dans l'un des cas suivants:
a) lorsque les mesures de recouvrement ont été suspendues à cause de l'incapacité de payer;
b) lorsqu'une personne ne peut conclure une entente de paiement qui serait raisonnable parce que les pénalités et les frais d'intérêts représentent une partie considérable des versements; dans un tel cas, il y a lieu de penser à renoncer à la totalité ou à une partie des pénalités et des intérêts pour la période allant de la date d'échéance du premier paiement en vertu de l'entente de paiement jusqu'au moment où les montants dus sont payés, pourvu que les versements convenus soient effectués à temps.
9. Lorsque des circonstances extraordinaires indépendantes de la volonté d'une personne ont empêché celle-ci de se conformer à la Loi, les facteurs suivants seront pris en considération par le Ministère pour déterminer s'il doit annuler les pénalités et les intérêts ou y renoncer :
a) La personne a-t-elle des antécédents satisfaisants d'observation volontaire (c.-à-d. les déclarations de TPS précédentes ont-elles été produites et les paiements ont-ils été versés à temps)?
b) La personne a-t-elle, en connaissance de cause, laissé subsister un solde en souffrance sur lequel se sont accumulés les pénalités et les intérêts?
c) La personne a-t-elle agi avec diligence pour remédier à tout retard ou à toute omission en matière d'observation qui a donné lieu à l'imposition initiale des pénalités et des intérêts?
d) Y a-t-il des preuves selon lesquelles la personne a fait preuve de prudence et de diligence (p. ex. a pris des précautions en vue de troubles prévus) et n'a pas fait preuve de négligence ni d'imprudence dans la conduite de ses affaires? Il revient à l'inscrit de se tenir au courant de tout changement apporté à l'administration de la TPS de manière à assurer qu'il continue à observer la Loi.
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IC92-2 Guidelines for the Cancellation and Waiver of Interest and Penalties
| 5. Penalties and interest may be waived or cancelled in whole or in part where they result in circumstances beyond a taxpayer's or employer's control....
6. Cancelling or waiving interest or penalties may also be appropriate if the interest or penalty arose primarily because of the actions of the Department....
7. It may be appropriate, in circumstances where there is an inability to pay amounts owing to consider waiving or cancelling interest in all or in part to facilitate collection. For example,
(a) When collection has been suspended due to an inability to pay.
(b) When a taxpayer is unable to conclude a reasonable payment agreement because the interest charges absorb a significant portion of payments. In such a case, consideration may be given to waiving interest in all or in part for a period from when payments commence until the amounts owing are paid provided the agreed payments are made on time.
10. The following factors will be considered when determining whether or not the Department will cancel or waive the interest and penalties:
(a) whether or not the taxpayer or employer has a history of compliance with tax obligations
(b) whether or not the taxpayer or employer has knowingly allowed a balance to exist upon which arrears interest has accrued;
(c) whether or not the taxpayer has exercised a reasonable amount of care and has not been negligent or careless in conducting their affairs under the self-assessment system;
(d) whether or not the taxpayer or employer has acted quickly to remedy any delay or omission.
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5. Il sera convenable d'annuler la totalité ou une partie des intérêts ou ces pénalités, ou de renoncer à ceux-ci, si ces intérêts ou ces péenalités découlent de situations indépendantes de la volonté du contribuable ou de l'employeur...
6. L'annulation des intérêts ou des pénalités ou la renonciation à ceux-ci peuvent également être justifiées si ces intérêts ou pénalités découlent principalement d'actions attributables au Ministère...
7. Il peut être convenable dans des situations où il y a incapacité de verser le montant exigible d'examiner la possibilité de renoncer ou d'annuler la totalité ou une partie des intérêts afin d'en faciliter le recouvrement, par example dans les cas suivants:
a) lorsque les mesures de recouvrement ont été suspendues à cause de l'incapacité de payer;
b) lorsqu'un contribuable ne peut conclure une entente de paiement qui serit raisonnable parce que les frais d'intérêts comptent pour une partie considérable des versements; dans un tel cas, il faudrait penser à renoncer à la totalité ou à une partie des intérêts pour la période où les versements débutent jusqu'à ce que le montant exigible soit payé pourvu que les versements convenus soient effectués à temps
10. Le Ministère tiendra compte des points suivants dans l'étude des demandes d'annulation des intérêts ou des pénalités ou de renonciation à ceux-ci:
a) si le contribuable ou L'employeur a respecté, par le passé, ses obligations fiscales;
b) si le contribuable ou L'employeur a, en connaissance de cause, laissé subsister un solde en souffrance qui a engendré des intérêts sur arriérés;
c) si le contribuable ou l'employeur a fait des efforts raisonnables et s'il n'a pas fait preuve de négligence ni d'imprudence dans la conduite de ses affaires en vertu du régime d'autocotisation;
d) si le contribuable ou l'employeur a agi avec diligence pour remédier à tout retard ou à tote omission.
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[4] As the facts as related in the affidavit of Debbie Montgomerie and George Vitellaro were quite irreconcilable, this Court ordered the applicant to provide new affidavit evidence on six points in dispute on February 25th, 2004.
[5] A new affidavit by George Vitellaro was filed on March 15th, 2004, and CCRA filed an additional affidavit by J. Jackson. A further hearing then took place in light of these affidavits.
[6] On the basis of the new evidence, most of the evidence of George Vitellaro and Debbie Montgomerie can now be reconciled. There is no longer any issue of income which is not accounted for or a gap in the Applicants' Monthly Income and Expense Statements. Two major issues of difference, however, still exist.
[7] The first concerns a property located at 2405 Winston Park drive, Oakville, Ontario (the Oakville Property) owned by An-Dell. An-Dell in turn is owned by George and Beate Vitellaro.
[8] On February 22nd, 2002, when the fairness decision was made, the Oakville Property, according to Debbie Montgomerie, carried a mortgage of $292,000 while it was originally acquired for $535,000. She, therefore, concluded that there was room to mortgage the property and pay the tax debt. George Vitellaro originally claimed that the Oakville Property was mortgaged to the hilt and that there was no room for further encumbrances.
[9] However, the new Vitellaro affidavit shows that he refinanced the mortgage on the Oakville Property as of April 26th, 2002. The property now carries a first mortgage of $355,000 and a second mortgage of $75,000. Given this total new mortgaging of $430,000, there was indeed room on February 22nd, 2002, for further mortgaging. Since the fairness decision was made the Oakville Property carries additional encumbrance in the amount of $138,000.
[10] Secondly, both parties agree that George and Beate Vitellaro own their residence and have equity of $76,000 in that property. The Vitellaros feel that it would be unfair to assume that they have to mortgage or sell their house in order to pay interest and penalties on their tax debt. There is no foundation for this assumption and Debbie Montgomerie was quite right in her conclusion that part of this equity could be used to finance the payment of their outstanding interest and penalties. It would not be unreasonable to assume that an amount in the neighbourhood of $50,000 could be raised on this property.
[11] The standard of review for "fairness" decisions by the Minister under the Income Tax Act and Excise Tax Act is patent unreasonableness (Metro-Can Construction Ltd. v. R. (2002), 225 F.T.R. 154; Cheng v. Canada, [2001] 4 C.T.C. 190; Brickenden v. Canada (Customs & Revenue Agency), [2003] F.C.J. No. 1187).
[12] In Kaiser v. Canada (Minister of National Revenue) (1995), 95 D.T.C. 5187 at 5188-5189 Rouleau J. set out the basic approach to fairness reviews:
The purpose of this legislative provision is to allow Revenue Canada, Taxation, to administer the tax system more fairly, by allowing for the application of common sense in dealing with taxpayers who, because of personal misfortune or circumstances beyond their control, are unable to meet deadlines or comply with rules under the tax system. The language used in the section bestows a wide discretion on the Minister to waive or cancel interest at any time. To assist in the exercise of that discretion, policy guidelines have been formulated and are set out in Information Circular 92-2.
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Every case is required to be decided on its own merit in order that circumstances unique to that individual taxpayer are taken into account ... [W]hen the Minister exercises his discretion under subsection 220(3.1), he is required to take into account considerations relevant and unique to that taxpayer alone. (underlining added)
[13] The Vitellaros and their companies owe interest and penalties in the total amount of $181,683.73. As of February 28th, 2002, when the fairness decision was made, they had two potential sources of financing: the Oakville Property for at least $138,000 and their residence for approximately $50,000, making a total of $188,000.
[14] Thus, there were sources of capital available to the Vitellaros and their company to pay the debt owing. Whether they would pay the amount all at once or in instalments and whether they would finance it or pay it by instalments was up to them. However, while the amount which was owed and remains owing was large, this Court cannot find that the CCRA acted in a patently unreasonable, or even an unreasonable manner in concluding that the Vitellaros can pay the amount of $181,683.73 without hardship.
[15] This application is accordingly dismissed. There will be no order as to costs.
ORDER
THIS COURT ORDERS that this application for judicial review is dismissed without costs.
"K. von Finckenstein"
Judge
FEDERAL COURT
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-553-02
STYLE OF CAUSE: THE NAIL CENTRE AND ESTHETICS SALON
v.
CANADA CUSTOMS AND REVENUE AGENCY
PLACE OF HEARING: Toronto, Ontraio
DATE OF HEARING: April 5, 2004
REASONS FOR ORDER: von Finckenstein J.
DATED: April 15, 2004
APPEARANCES:
SOLICITORS OF RECORD:
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GARDINER, MILLER ARNOLD LLP
Barristers & Solicitors
Toronto, Ontario
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FOR THE APPLICANT
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Department of Justice
Toronto, Ontario
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FOR THE RESPONDENT
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