Date: 20100805
Docket: T-2135-07
Citation: 2010 FC 809
Ottawa, Ontario, August
5, 2010
PRESENT: The Honourable Mr. Justice O'Keefe
BETWEEN:
ROBERT
D. HOLMES
Applicant
and
ATTORNEY
GENERAL OF CANADA
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 November 3, 2007,
wherein a director at Canada Revenue Agency (CRA), did not use her discretion
to grant the applicant relief under subsection 281.1 of the Excise Tax Act,
R.S.C. 1985, c. E-15 (the ETA), from penalties and interest assessed.
Background
[2]
The
applicant, a businessman, sold multiple condominium units located in Moncton, New
Brunswick.
He did not remit HST on the sale as was required under the ETA. On an audit
review, CRA caught the mistake and assessed the applicant at $105,368.26 owing
in arrears.
[3]
In
February 2007, after unsuccessfully appealing the assessment, the applicant
sought to have cancelled or waived the interest and penalties, approximately
$11,434.43, under the tax fairness provisions in the ETA. The basis of the
applicant’s request for cancellation was that he was suffering from severe
depression at the time of the real estate transactions in question. The failure
to collect the appropriate taxes was unintentional. His illness had caused him
to resign from his employment at Correctional Services Canada and begin
receiving extended earnings replacement benefits under the Workers
Compensation Act for his permanent medical impairment. He also received a
buyout from his employer, but claimed that his wife and lawyer handled his
financial decisions as he was not competent to do so.
[4]
On
March 30, 2007, CRA issued a decision letter to the applicant denying his
request on the basis that he had failed to show extraordinary circumstances
preventing him from complying with his statutory obligations.
[5]
On
June 6, 2007, the applicant sought a second independent review of this decision
to the Director.
[6]
On
September 27, 2007, Yvon Boudreau prepared a synopsis of the applicant’s
fairness request and tax history for internal use. He recommended that the
penalty and interest applicable to the two condominium units be waived plus any
interest accrued on the account since December of 2006. He further recommended
that the interest on the total amount of the penalty be waived for the period
June 2007 to September 2007 due to departmental delay.
[7]
Significantly,
the review of the applicant’s tax history revealed several things. It revealed
that the officer who had conducted the original audit of the applicant had
previously advised the applicant on how to deal with the sale of the condominiums.
It also revealed that after the applicant’s diagnosis with depression, he
purchased and renovated a commercial building for which he found a tenant. Also
since his diagnosis, the applicant had opened a fast food restaurant with his
son called “Skipper Jacks”, and had filed his HST returns on time.
[8]
On
September 28, 2007, a second internal memorandum was created in regards to the
applicant’s request. This memo completed by Kevin Jensen and titled Fairness
Committee Recommendations was signed by two other employees. In the memorandum,
denial of the request was recommended because:
1. The applicant had a
poor compliance history;
2. The applicant had
knowingly allowed a balance to exist on his HST account and his related
accounts;
3. The applicant was
told on two separate occasions that he must self-assess and/or charge the
GST/HST when he sold the condominium units; and
4. Despite a diagnosis
of major depressive disorder and bipolar mood disorder, the applicant continued
to purchase properties, renovate and open a restaurant.
[9]
On
October 22, 2007, the applicant’s request was the subject of a third
memorandum, this time considering whether the request should be granted on the
basis of financial hardship. The memorandum recommended denial of the request
because the applicant had realizable equity in property and owned non-income
producing real property for investment purposes. It also divulged that after
December 2006, the applicant had purchased a vacant commercial lot.
[10]
In
the final adjudication of the applicant’s request, the Director of the Moncton
Tax Services Office (the director) considered all of the applicant’s evidence,
as well as the information on his file and each of the recommendations. Her
conclusion was that the applicant’s situation showed no financial hardship or
extraordinary circumstances that would warrant a cancellation of the penalties.
The decision did waive the interest that had accrued during the period in which
the request was processed.
Issues
[11]
The
issues are as follows:
1. Has the applicant
plead a proper ground of review?
2. What is the standard
of review?
3. Was the CRA
director’s ultimate decision reasonable?
Applicant’s Written Submissions
[12]
The
applicant submits that the decision was unreasonable and refers to Information
Circular 07-1, the guidelines which inform discretionary decisions regarding
the cancellation or waiver of tax penalties or fees (the Guidelines). The
applicant submits that his diagnosed bipolar condition ought to have been
considered as extraordinary circumstances under Part II of the Guidelines, because
it prevented him from making logical decisions. It was revealed in
cross-examination that the director relied on the Workers’ Compensation report
for information about bipolar disorder and did not do any other research on the
condition. Moreover, the director’s decision was also based on the applicant’s
apparent ability to continue making business decisions despite his condition,
demonstrated by several transactions and deals he entered into post-diagnosis.
In reality, many of those transactions were clearly illogical decisions on the
applicant’s part. For example, he sold a $350,000 home for $200,000 and
borrowed $30,000 to finance the purchase of a $5,000 vacant commercial lot. The
applicant further suggests that taking all of his retirement money and
investing it into a restaurant was also an illogical decision.
Respondent’s Written Submissions
[13]
The
respondent submits that the standard of review is reasonableness. The
discretion conferred to the Minister under the ETA is similar to that conferred
in the taxpayer relief provisions of the Income Tax Act, R.S.C. 1985, c.
1, decisions under which the jurisprudence has held are reviewable against the
reasonableness standard.
[14]
The
respondent submits that the decision was reasonable and that the director considered
all of the relevant facts in the case. She considered the statements the
applicant submitted regarding his medical condition, but there was not
sufficient information before her explaining how those conditions prevented
compliance. She also had evidence before her that the applicant had been
informed on two occasions about the necessity of collecting and paying tax on
the disposition of the condominium units. There was also evidence of the
applicant’s involvement in other commercial activity during the period in
question. In sum, her decision was justified, transparent and intelligible, and
clearly falls within the range of possible acceptable outcomes.
Analysis and Decision
[15]
Issue
1
Has the applicant plead a
proper ground of review?
Counsel for the respondent has
argued in the memorandum of fact and law that the applicant has failed to
identify a ground of review on which the Court is entitled to interfere with
the respondent’s exercise of discretion under section 281.1 of the ETA.
[16]
Subsection
18.1(4) of the Federal Courts Act does not specifically identify any
ground on which the Court can grant an application for judicial review of the
exercise of statutory discretion. In Telfer v. Canada (Revenue
Agency),
2009 FCA 23, [2009] 4 C.T.C. 123, there was a similar deficiency, yet it was
held at paragraph 23 that:
. . . the grounds of review set out in
subsection 18.1(4) are potentially applicable to discretionary administrative
action, including error of law (paragraph 18.1(4)(c)) and the residual ground
of review in paragraph 18.1(4)(f) ("acted in any other way that was
contrary to law").
Thus, I would not hold
that the applicant has failed to raise a proper ground of review.
[17]
Issue
2
What is the standard of
review?
Section 281.1 of the ETA, set
out in the annex to this decision, is a fairness provision and in particular,
provides the Minister with the discretion to waive penalties or interest. It is
similar in substance to the taxpayer fairness provisions of the Income Tax
Act, decisions under which the Federal Court of Appeal has recently
confirmed are to be afforded significant deference (see Telfer above).
[18]
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).
Indeed, the Federal Court of Appeal in Telfer above, applied the
reasonableness standard as set out by the Supreme Court at paragraph 47 of the Dunsmuir
decision. That approach requires the reviewing court to peer into the qualities
which make the decision reasonable and be concerned with justification, transparency
and intelligibility and whether the ultimate result falls into the range of
possible, acceptable outcomes.
[19]
However,
the Telfer Court also
recognized that this standard is not a one-size-fits-all approach. Applying the
reasonableness standard to administrative decisions requires the reviewing
court to have regard to the context in which the decision takes place (see Telfer
above at paragraph 29).
[20]
Tax
fairness decisions are informal and non-adjudicative in nature. In their
oft-cited text, D. J. M. Brown and J. M. Evans refer specifically to
discretionary tax fairness/relief decisions as an example of discretionary
non-adjudicative action not subject to a strict duty of fairness (Brown and
Evans, Judicial Review of Administrative Action in Canada, Toronto:
Canvasback, 1998 (loose-leaf)], at pp. 15-21).
[21]
In
my view, a judicial review of such decisions exercising statutory discretion
ought to heed the words of the Supreme Court in Maple Lodge Farms Ltd. v.
Canada, [1982] 2 S.C.R. 2 at pages 7 and 8:
… It is, as well, a clearly-established
rule that the courts should not interfere with the exercise of a discretion by
a statutory authority merely because the court might have exercised the
discretion in a different manner had it been charged with that responsibility.
Where the statutory discretion has been exercised in good faith and, where
required, in accordance with the principles of natural justice, and where
reliance has not been placed upon considerations irrelevant or extraneous to
the statutory purpose, the courts should not interfere.
[22]
For
the decision in the present case, I shall apply the deferential reasonableness
standard in accordance with this passage.
[23]
Issue
3
Was the CRA
director’s ultimate decision reasonable?
The centrepiece of the
applicant’s relief request related to his diagnosed psychiatric disorder and
the effect it had had on his ability to make logical decisions. This, in the
applicant’s view, fell squarely into the category of exceptional circumstances
outlined in the Guidelines.
[24]
As
referred to above, there was an internal recommendation that the penalty and
interest be waived made by an officer with extensive knowledge of the
applicant’s tax history. That recommendation read in part:
In Dec 2002, after having received
instructions as to what was required regarding a change in use of the condo
units, the registrant failed to disclose to the auditor Don Daigle, that he was
renting two of units to his children. Mr. Holmes was diagnosed with a major
depressive disorder in Aug 2003. I would think that this disorder did not show
itself overnight and that Mr. Holmes was affected by this medical condition
prior to Aug 03 and most likely would have been suffering from this in Dec 2002
when the self supply on the 2 units occupied by his children, was due. In view
of this I recommend the penalty and interest applicable to these two units be
waived. The amount of the recommended reduction is $9,830.28 plus any interest
accrued on this amount since Dec 2006.
On another note, Mr. Holmes second
request for fairness was submitted in June 2007. Due to departmental delays it
has taken 4 months for this request to be dealt with. In view of this I
recommend interest on the total amount of the penalty be waived for the period
June 07 to Oct 07.
[25]
This
internal recommendation was not accepted. Instead, it appears that a second
internal memo was requested by the Director. This second memo recommended
denying relief for the following reasons:
1. The applicant had a
poor compliance history.
2. The applicant had
knowingly allowed a balance to exist on his HST account and his related
accounts.
3. The applicant was
told on two separate occasions that he must self-assess and/or charge the
GST/HST when he sells the condo units.
4. Despite a diagnosis
of major depressive disorder and bipolar Mood disorder, the applicant continued
to purchase properties, renovate and open a restaurant.
[26]
The
decision letter received by the applicant contained no explanation as to how
the Director viewed his condition. In relevant part it simply read:
…
After considering all the circumstances
of your case, I remain of the opinion that cancellation of interest and penalty
under the financial hardship or extraordinary circumstance categories is not
warranted and that the original decision to deny your request should stand….
[27]
Since
the decision letter did not provide any guidance except for providing a result,
I must conclude that the second memo was preferred over the first, but I cannot
ascertain why. Nor was it explained why a second recommendation was required.
[28]
While
it should be expected that the reasons provided in tax fairness decisions will
be short and reflect the informal nature discussed above, I would expect the
taxpayer to be informed as to how the primary consideration was dealt with. The
Guidelines are an indication that a somewhat structured decision will be made.
[29]
I
am of the view that given the specific facts of the record before her in this
case, the Director was required to provide some reasons accompanying the
decision explaining, even if very briefly, why his primary ground had not been
accepted. Without this, the taxpayer had a legitimate concern that the
discretionary decision had been made without taking into account a very
relevant consideration.
[30]
I
am also of the view that this omission left the decision making process lacking
a necessary component of transparency. In either case, it is enough to render
the decision unreasonable.
[31]
I
would attribute little if any weight to the portion of the Director’s affidavit
that provided a more thorough explanation of her decision. I similarly give
little weight to the transcript of her cross-examination by the self-represented
applicant. This information was not conveyed in the actual decision but was
only made available to support or justify the Director’s original decision.
[32]
The
application for judicial review is therefore allowed and the matter is referred
to the Minister to redetermine whether or not to cancel all or part of the
penalty assessed to the applicant.
JUDGMENT
[33]
IT
IS ORDERED that the application for judicial review is allowed and the
matter is referred to the Minister to redetermine whether or not to cancel all
or part of the penalty assessed to the applicant.
“John
A. O’Keefe”
ANNEX
Relevant Statutory Provisions
Excise Tax Act, R.S.C. 1985, c. E-15
|
281.1(1) The
Minister may, on or before the day that is 10 calendar years after the end of
a reporting period of a person, or on application by the person on or before
that day, waive or cancel interest payable by the person under section 280 on
an amount that is required to be remitted or paid by the person under this
Part in respect of the reporting period.
(2) The
Minister may, on or before the day that is 10 calendar years after the end of
a reporting period of a person, or on application by the person on or before
that day, waive or cancel all or any portion of any
(a) penalty
that became payable by the person under section 280 before April 1, 2007, in
respect of the reporting period; and
(b) penalty
payable by the person under section 280.1, 280.11 or 284.01 in respect of a
return for the reporting period.
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281.1(1)
Le ministre peut, au plus tard le jour qui suit de dix années civiles la fin
d’une période de déclaration d’une personne ou sur demande de la personne
présentée au plus tard ce jour-là, annuler les intérêts payables par la personne
en application de l’article 280 sur tout montant qu’elle est tenue de verser
ou de payer en vertu de la présente partie relativement à la période de
déclaration, ou y renoncer.
(2)
Le ministre peut, au plus tard le jour qui suit de dix années civiles la fin
d’une période de déclaration d’une personne ou sur demande de la personne
présentée au plus tard ce jour-là, annuler tout ou partie des pénalités
ci-après, ou y renoncer :
a) toute
pénalité devenue payable par la personne en application de l’article 280
avant le 1er avril 2007 relativement à la période de déclaration;
b)
toute pénalité payable par la personne en application des articles 280.1,
280.11 ou 284.01 relativement à une déclaration pour la période de
déclaration.
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