Date: 20100119
Docket: T-632-09
Citation: 2010 FC 52
Ottawa, Ontario, January 19, 2010
PRESENT: The Honourable Mr. Justice O'Keefe
BETWEEN:
IAN
SPENCE
Applicant
and
CANADA
REVENUE AGENCY
Respondent
REASONS FOR JUDGMENT AND JUDGMENT
O’KEEFE J.
[1]
This
is an application pursuant to section 18.1 of the Federal Courts Act,
R.S.C. 1985, c. F-7, for judicial review of a decision, dated March 27, 2009,
wherein the fairness committee of the respondent (CRA) did not grant relief
under subsection 220(3.1) of the Income Tax Act, R.S.C. 1985, c. 1 as
amended (the “Act”), to the applicant for the waiver of penalties and interest
assessed pursuant to subsection 163(1) of the Act.
[2]
The
applicant requests an order setting aside the decision of the respondent and
remitting the matter back to the respondent for reconsideration before a
different ministerial delegate to be decided in accordance with this Court’s
reasons.
Introduction
[3]
This
is a case where a decision maker at the CRA chose to evoke guidelines as the
sole reason for ruling against the applicant. The Act confers discretion on the
Minister or his delegate to grant relief from all or any portion of a tax
penalty. Instead of actually making the discretionary decision as required, the
decision maker’s written reasons read as if she was saying that the guidelines
forced her hand. Treating guidelines as binding upon the taxpayer was a clear
error of law and as such, I would allow the judicial review and send the matter
back for redetermination.
Background
[4]
During
the 2006 taxation year, the applicant worked as an employee for various
employers. In February of 2007, he took all the documents to H & R Block to
have his tax return prepared. Despite not having a T-4 slip from one of his
employers, the applicant had provided H & R Block with everything needed to
calculate his 2006 T1 tax return accurately. H & R Block failed to include
his income from two employment sources, thereby understating the applicant’s
income. They reported his total income to be $21,696 when it should have been
$57,915. H & R Block calculated the applicant’s tax return to be $2,543.08.
[5]
The
respondent eventually caught the mistake and in April of 2008 issued to the
applicant a notice of reassessment. Had the documentation from the other two
sources been included, the applicant’s refund would have been $2,419.10.
Therefore, according to the notice of reassessment, the applicant had been
overpaid by $123.98. The notice of reassessment also assessed the applicant
statutory federal and provincial omission penalties totalling $7,243.80 and
arrears interest of $380.05.
[6]
In
an affidavit, the representative from H & R Block who prepared the
applicant’s 2006 tax return admitted the error and admitted not being as careful
in preparing the applicant’s return as he should have been. The parties agreed
that the applicant had not withheld anything required by H & R Block, and
that it was not the applicant’s intention to omit income.
[7]
In
August of 2008, H & R Block applied to the respondent for taxpayer relief
on behalf of the applicant, on the basis that the applicant was unaware of the
omission and that the penalties were excessive in the circumstances. The
respondent’s first level fairness committee denied the request stating in part
that “CRA is not responsible for third party errors and omissions”.
[8]
On
November 5, 2008, H & R Block sent a second application requesting relief
under the second level fairness review process. The respondent’s internal
document prepared in respect of the application (the “fairness report”) stated
that the penalty was harsh but did not recommend cancelling the penalties as
there were no extraordinary circumstances.
[9]
A
delegated representative of the Minister was assigned to consider the applicant’s
request. Her letter of denial stated that she had reviewed the circumstances of
the case in relation to the provisions of the “taxpayer relief legislation”,
but that those relief provisions do not allow for the cancellation of penalties
and interest in these types of situations.
Issues
[10]
The
issues are as follows:
1. What is the
standard of review?
2. Did the
ministerial representative base her decision on any findings of fact that were
made in a perverse or capricious manner or without regard for the material
before her?
3. Did the
ministerial representative err in law by concluding that the taxpayer relief provisions
did not permit the applicant’s penalties to be cancelled?
4. Was the
ministerial representative’s ultimate decision reasonable?
Applicant’s Submissions
[11]
The
applicant submits that the standard of review is reasonableness.
[12]
The
applicant submits that the decision maker erred by not considering or giving
sufficient weight to the following relevant facts:
-
The
applicant attempted to be compliant by filing his 2006 tax return early;
-
The
applicant retained and relied on a professional tax preparer;
-
The
tax preparer admits the applicant gave everything needed and admits making the
error;
-
Taxes
were withheld and remitted to the respondent throughout the 2006 tax year, such
that the applicant was in a refund position;
-
The
applicant was only overpaid $123.98;
-
The
penalty assessed is 58.42 times that amount.
[13]
The
applicant also submits that the ministerial representative erred in law when
she stated that the taxpayer relief provisions do not allow for the
cancellation of penalties in these types of situations. The guidelines referred
to are not exhaustive and do allow relief to be granted even where the
taxpayer’s circumstances do not fall within the designated categories. In
addition, the guidelines specifically allow for the possibility of relief being
granted in the case of a third party error. The guidelines are not meant to
interfere with the spirit and intent of the Act. A penalty 58 times more than
the amount of the error goes against the spirit and intent.
Respondent’s Submissions
[14]
The respondent submits that the standard of review is
reasonableness. A high degree of deference is to be afforded when dealing with
findings of fact and discretionary decisions.
[15]
The respondent submits that the ministerial representative did in
fact consider the facts listed by the applicant. The taxpayer relief provisions
set out a non-exhaustive list of factors to consider when exercising the
Minister’s discretion: (i) extraordinary circumstances, (ii) actions of the
CRA; and (iii) inability to pay or financial hardship. The applicant failed to
demonstrate that there were any extraordinary circumstances. The applicant
failed to review his return before signing it. A quick review would have
revealed that H &R Block had failed to include 63% of his income. The
ministerial representative considered all the relevant facts in this case and
her final decision was reasonable in the sense that it was justified,
transparent and intelligible and fell within the range of possible, acceptable
outcomes.
Analysis and Decision
[16]
Issue
1
What is the standard of
review?
The Act contains several
provisions referred to as the “fairness provisions” or the “fairness package”,
which in effect allow tax authorities to grant relief against the operation of
certain provisions of the Act. Subsection 220(3.1) is a fairness provision and
in particular, provides the Minister with the discretion to waive penalties or
interest as follows:
The Minister may, […], 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.
[17]
Upon
judicial review, where the nature of the question is one of discretion, the
deferential standard of reasonableness will usually automatically apply (see Dunsmuir
v. New
Brunswick,
2008 SCC 9, [2008] 1 S.C.R. 190, [2008] S.C.J. No. 9 (QL) at paragraph 53). In
this case, reasonableness is the appropriate standard to apply to the ultimate
decision by the ministerial representative whether or not to cancel all or part
of the penalty assessed to the applicant.
[18]
Any
findings of fact made by the ministerial representative in coming to her
ultimate decision are also to be afforded a considerable degree of deference,
as imposed by paragraph 18.1(4)(d) of the Federal Courts Act, R.S.C.
1985, c. F-7 which states:
18(4) The Trial Division may grant relief
under subsection (3) if it is satisfied that the federal board, commission or
other tribunal
…
(d) based its decision or order on an
erroneous finding of fact that it made in a perverse or capricious manner or
without regard for the material before it;
[19]
The
Supreme Court in Canada (Citizenship and Immigration) v. Khosa, 2009
SCC 12, [2009] S.C.J. No. 12 (QL), recently referred to the impact of these
legislative instructions:
46 More generally, it is clear from
s. 18.1(4)(d) that Parliament intended administrative fact finding to
command a high degree of deference….
[my emphasis]
[20]
I
wish to first deal with Issue 3.
[21]
Issue
3
Did the ministerial
representative err in law by concluding that the taxpayer relief provisions did
not permit the applicant’s penalties to be cancelled?
The ministerial representative’s
decision letter reads in part as follows:
We have reviewed the circumstances of the
case in relation to the provisions of the Taxpayer Relief legislation, and have
determined that it would not be appropriate to cancel the penalties and
interest.
It is unfortunate that, through no
intentional act, the income was omitted from your client’s 2006 income tax
return. Regrettably, an error was made and subsequently, penalties and arrears
interest were correctly charged under the Income Tax Act. The Taxpayer Relief provisions
do not allow for the cancellation of penalties and interest in these types of
situations. In addition, the Canada Revenue Agency (CRA) cannot be held
responsible for errors made by the tax preparer during the completion of the
return.
[22]
In
my view, the ministerial representative’s error is contained in the following
sentence from her decision letter:
The Taxpayer Relief provisions do not
allow for the cancellation of penalties and interest in these types of
situations.
[my emphasis]
[23]
This
was an error. The nature of the error is the decision maker’s apparent opinion
that the taxpayer relief provisions, contained in Income Tax Information
Circular No. IC07-1, were binding law. The ministerial representative’s
reference to them as “Taxpayer Relief Legislation” is also indicative of her
apparent belief that the guidelines were law.
[24]
In
general, guidelines such as the taxpayer relief provisions are not law, but can
be very beneficial to both decision makers and members of the public to the
extent that they provide for more organized analysis and reasons and enhance
the level of consistency and accountability to the public: see D. J. M. Brown,
and J. M. Evans. “Judicial Review of Administrative Action in Canada”. Toronto: Canvasback,
1998 (loose-leaf updated July 2008) at p. 12:44. Some statutes in fact confer
the authority to formulate legally binding rules or guidelines. Where that is
not the case, guidelines can still be considered in the process and can even be
determinative, provided the decision maker puts his or her mind to the specific
circumstances of the case and does not treat the guidelines as binding (see Maple
Lodge Farms Ltd. v. Canada, [1982] 2 S.C.R. 2).
[25]
In
reality, many discretionary decision makers will be government employees who
may be required to follow non-legal rules or guidelines by their employer.
However, even if employees face such constraints, the law does not permit the
decision maker to treat the guidelines as binding upon the individual
requesting relief, in this case, the applicant taxpayer. Most guidelines remedy
this conundrum and eliminate the possibility that a decision maker would have
to choose between disobeying their employer and erring in law. For example, the
taxpayer relief provisions contain a statement in their introducing paragraphs
which reads:
6. These are only guidelines. They
are not intended to be exhaustive, and are not meant to restrict the spirit or
intent of the legislation.
[my
emphasis]
[26]
This
paragraph assures the reader that the guidelines are not law. As we shall see,
there are additional provisions within the guidelines that allow for flexibility.
Even if the guidelines were elevated to the status of binding law, they would
provide for the possibility of relief in the applicant’s situation.
[27]
When
the ministerial representative states that the taxpayer relief provisions do
not allow for relief in these types of situations, she was apparently referring
to paragraph 23 of the guidelines which indicates that applications under
subsection 220(3.1) will be “justified” when any of the following exist: (i)
extraordinary circumstances, (ii) actions of the CRA (which caused the
penalty), (iii) inability to pay or financial hardship. This paragraph, however,
does not limit relief to these types of situations. Indeed, paragraph 24 reads:
[24.] The Minister may also grant relief
if a taxpayer's circumstances do not fall within the situations stated in ¶ 23.
[28]
Paragraph
25 of the guidelines explains that extraordinary circumstances mean
circumstances beyond the taxpayer’s control and gives a short list of examples.
[29]
Allowing
for further flexibility, paragraph 35 of the taxpayer relief provisions reads
as follows:
35. Taxpayers are generally considered to
be responsible for errors made by third parties acting on their behalf for
income tax matters. A third party who receives a fee and gives incorrect
advice, or makes arithmetic or accounting errors, is usually regarded as being
responsible to their client for any penalty and interest charges that the
client has because of the party's action. However, there may be exceptional
situations, where it may be appropriate to provide relief to taxpayers because
of third-party errors or delays.
[30]
Thus,
the guidelines suggest that even in the applicant’s situation, decision makers
should probe further to determine if exceptional circumstances exist. Of course,
decision makers cannot then frustrate this by limiting what will be excepted as
an exceptional circumstance to things listed in the guidelines. The nature of
guidelines is that they can never dictate the answer to a discretionary
determination. The decision maker must look at the taxpayer’s situation and
state whether they think the taxpayer’s circumstances warrant relief. Such
determinations will be afforded deference.
[31]
Subsection
220(3.1) grants broad discretion to the Minister to allow relief, or partial
relief, and the Minister in turn delegates this discretion. The guidelines are
helpful but do not impede this discretion. It is this delegated decision maker
who must therefore make the final decision, not the guidelines.
[32]
There
was simply no basis for the ministerial representative to claim that the
taxpayer relief provisions did not allow relief. This statement is a reviewable
error of law.
[33]
Because
of my findings on this issue, I need not deal with the other issues.
[34]
The
application for judicial review is allowed, the decision is set aside and the
matter is referred to a different ministerial delegate for redetermination.
[35]
The
applicant shall have his costs of the application.
JUDGMENT
[36]
IT
IS ORDERED that:
1. The application for
judicial review is allowed, the decision is set aside and the matter is
referred to a different ministerial representative for redetermination.
2. The applicant shall
have his costs of the application.
“John
A. O’Keefe”
ANNEX
Relevant Statutory Provisions
Income Tax Act, R.S.C. 1985, c. 1 (5th
Supp.)
|
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.
|
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.
|
Email this Content