Docket: T-1846-11
Citation:
2012 FC 461
Vancouver, British Columbia, April 19, 2012
PRESENT: The Honourable Madam
Justice Snider
IN THE MATTER OF
ACCREDITED HOME LENDERS CANADA INC.
and an Application by
the Minister of National Revenue
under section 225.2 of
the Income Tax Act
BETWEEN:
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THE MINISTER OF
NATIONAL REVENUE
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Applicant
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and
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ACCREDITED HOME
LENDERS
CANADA INC.
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Respondent
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REASONS FOR
ORDER AND ORDER
[1]
The Minister of National Revenue (Minister) applied to the
Federal Court and obtained an ex parte Order dated November 16, 2011
(the Jeopardy Order), pursuant to s. 225.2 of the Income Tax Act, RSC
1985, c 1 (5th Supp) (the Act), against Accredited Home Lenders Canada
Inc. [AHLC]. In granting the Jeopardy Order, Justice O’Reilly was satisfied
that there were reasonable grounds to believe that the collection of an amount
assessed for tax by the Minister against AHLC would be jeopardized by a delay
in the collection of the amount. As permitted by the Jeopardy Order, the
Minister served Requirements to Pay on a number of Canadian financial
institutions and received funds in the amount of $6,160,192.03 (the Funds). The
Funds were credited to, and completely satisfied, AHLC’s income tax debt for
the 2010 taxation year.
[2]
AHLC now seeks a review the Jeopardy Order, asking this
Court to set aside the Jeopardy Order, and issue an Order requiring that the
Funds be returned to AHLC.
[3]
For the reasons that follow, I have determined that the
Jeopardy Order should stand.
I. Background
[4]
AHLC, a Canadian corporation, is described by the Minister
as a “subprime residential mortgage lender”. Accredited Home Lenders Inc.
(Parent Company), a US
corporation, is the 100% shareholder of AHLC. The Parent Company, a significant
subprime mortgage company in the US, filed for bankruptcy in May 2009. A Trustee in Bankrupcy (Trustee) has
been appointed. AHLC, although not in bankruptcy protection or insolvent, is in
the process of winding up its business in Canada. In June 2011, the Parent Company withdrew over $16 million from the bank
account of AHLC, thereby reducing the common stock value from $19,500,000 to
$1,843,324.
[5]
The context of the Jeopardy Order is the current tax
situation of AHLC. AHLC filed returns and paid taxes for the 2007 to 2009 tax
years, claiming income of $10,231,125. In AHLC’s income tax filing for 2010,
the company reported approximately $19,562,133 of income. The return has been
assessed and the tax owing is $6,132,014.84. AHLC has filed an objection to
this assessment.
[6]
At the same time as it filed its 2010 return, AHLC filed
amended returns (Amended Returns) for 2007 to 2009 claiming losses of
$18,694,130; this is a net difference of $28,925,255 from the originally-filed
returns. On the basis of the Amended Returns, AHLC expected to be able to claim
$18,694,130 in non-capital losses to be carried forward and applied to the 2010
tax debt, resulting in no tax being payable for 2010. Accordingly, AHLC made no
payment in respect of its 2010 tax filing. Unfortunately for AHLC, the Canada
Revenue Agency [CRA] determined that the Amended Returns would be processed
separately and refused to allow the carry forward for the 2010 tax year. As a
result, even though AHLC may ultimately be entitled to a refund in respect
of the 2007 to 2009 tax years, it is currently liable for a tax debt of
$6,132,014.84 for the 2010 tax year. This is the amount that is the subject of
the Jeopardy Order.
II. Statutory
Framework
[7]
The original ex parte motion for the Jeopardy Order
was brought under s. 225.2(2) of the Act, which provides that, upon such
application, a judge “shall” authorize the Minister to take steps to collect
any amount assessed under the Act where the judge “is satisfied that
there are reasonable grounds to believe that the collection of all or any part
of an amount assessed in respect of a taxpayer would be jeopardized by a delay
in the collection of that amount”. The “authorization” resulting from a
successful application under s. 225.2(2) of the Act is commonly referred
to as a “jeopardy order”. Where a judge has granted a jeopardy order, the
taxpayer may apply to the court to review the jeopardy order (Act, above
at s 225.2(8)). The relevant provisions are as follows:
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225.2(2) Notwithstanding section 225.1, where, on ex parte application
by the Minister, a judge is satisfied that there are reasonable grounds to
believe that the collection of all or any part of an amount assessed in
respect of a taxpayer would be jeopardized by a delay in the collection of
that amount, the judge shall, on such terms as the judge considers
reasonable in the circumstances, authorize the Minister to take forthwith any
of the actions described in paragraphs 225.1(1)(a) to 225.1(1)(g)
with respect to the amounts.
…
(8) Where a judge of a court has
granted an authorization under this section in respect of a taxpayer, the
taxpayer may, on 6 clear days notice to the Deputy Attorney General of Canada, apply to a judge
of the court to review the authorization.
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225.2 (2) Malgré l’article 225.1, sur requête ex parte
du ministre, le juge saisi autorise le ministre à prendre immédiatement des
mesures visées aux alinéas 225.1(1)a) à g) à l’égard du montant
d’une cotisation établie relativement à un contribuable, aux conditions qu’il
estime raisonnables dans les circonstances, s’il est convaincu qu’il existe
des motifs raisonnables de croire que l’octroi à ce contribuable d’un délai
pour payer le montant compromettrait le recouvrement de tout ou parties de ce
montant.
…
(8) Dans le cas où le juge saisi accorde l’autorisation
visée au présent article à l’égard d’un contribuable, celui-ci peut, après
avis de six jours francs au sous-procureur général du Canada, demander à un
juge de la cour de réviser l’autorisation.
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III. The Test on Review
[8]
The parties agree on the test to be applied on the review
of a jeopardy order under subsection 225.2(8) of the Act. As first
described by Justice MacKay in Minister of National Revenue v Satellite
Earth Station Technology Inc (1989), 30 FTR 94, 89 DTC 5506 [Satellite
Earth] (see also Minister of National Revenue v Reddy, 2008 FC 208
at paras 6 to 9, 329 FTR 13 [Reddy]), the test consists of two
components. At the first step, the applicant (AHLC) bears the burden of
establishing that there are reasonable grounds to doubt that the test required
by s. 225.2(2) has been met. If the applicant satisfies its burden at this
stage, the second stage of the test is engaged and the Minister has the
ultimate burden to demonstrate that, on a balance of probabilities, it is more
likely than not that collection would be jeopardized by delay.
[9]
A third element must also be considered. Given that the
initial motion for a jeopardy order is brought ex parte, there is a
heavy burden on the Minister to make full and frank disclosure to the motions
judge. Disclosure does not need to be perfect must be adequate or reasonable in
the circumstances (see Services ML Marengère Inc v Minister of National
Revenue (1999), 176 FTR 1 at para 63(5), 2000 DTC 6032)
IV. Analysis
[10]
As part of this review application, AHLC provided two
affidavits. The first was an affidavit of Mr. Christopher Gimpel, lead tax
partner with the firm of Deloitte & Touche LLP for AHLC and the second was
an affidavit of Mr. James Ransom, Vice President/Controller of AHLC. The
Minister also submitted three affidavits. The first was an affidavit of Mr.
James Corlett, Collections Officer with CRA, which affidavit was provided to
Justice O’Reilly as part of the original application. The Minister, in direct
response to the affidavits filed by AHLC on this motion, also submitted a
further affidavit by Mr. Corlett and an affidavit of Ms. Akina Lam, a
Collections Officer with CRA. I have reviewed and considered all of the
evidence before me on this review application and have also reviewed the
material filed on the original application.
[11]
The first step in my analysis is to determine whether AHLC
can satisfy me that there are reasonable grounds to doubt that the test in s.
225.2(2) was met.
[12]
As acknowledged by the parties, the key issue, in this
review, is whether there were reasonable grounds to believe that AHLC would
transfer the Funds to its US
parent.
[13]
The evidence before Justice O’Reilly must be considered in
its totality. What was that evidence?
·
AHLC does not believe that it has a tax debt. Stated
differently, AHLC believes that it will be successful in challenging its
assessments for 2007 to 2009, thereby ultimately providing a carry-forward loss
to its 2010 tax return.
·
In June 2011, apparently at the request of the Trustee of
the Parent Company, AHLC transferred $16 million to its US parent, thereby reducing the common stock value from
$19,500,000 to $1,843,324 as of September 30, 2011.
·
The Trustee of the Parent Company has requested the
transfer of funds.
·
Although AHLC is not insolvent, AHLC is in the process of
liquidating its operations, meaning that, on a going-forward basis, it will not
be earning income.
·
The only assets of AHLC were highly liquid assets with
financial institutions.
·
AHLC had filed the Amended Returns showing losses from
2007-2009 of over $18 million, whereas the previous tax returns had shown a
profit of approximately $10 million, for a net difference of almost $29
million.
·
AHLC was asked on a number of occasions to pay or provide
security for the 2010 assessed liability, but refused even though it was not
earning any interest on the Funds.
·
After many years of on-time income tax filings, AHLC was
two months late in filing its 2010 return.
·
AHLC had a past history of paying its taxes in instalments
or upon filing; in this case, no funds were paid toward the 2010 tax debt.
[14]
While AHLC has now offered explanations for some of its
actions and positions, it does not dispute the veracity of any of the
above-noted facts. I acknowledge that, considered in isolation, each of the
various facts may not have individually supported the CRA’s conclusion that the
2010 tax debt was at risk. However, considered together, the facts paint a
different and negative picture. Sudden changes in how the company operated
vis-à-vis CRA were understandably and reasonably taken as danger signs by CRA
officials. The state of affairs with respect to the Parent Company could not be
ignored. The refusal of AHLC to agree to provide security for the debt or to
make full payment, subject to a refund with interest if subsequently repaid by
CRA, appears illogical in the circumstances.
[15]
In its efforts to show that I should doubt the
reasonableness of the Jeopardy Order, AHLC’s key evidence appears to be to the
effect that AHLC would not transfer monies to the US in the face of tax obligations.
[16]
Some of these statements were set out in the affidavit of
Mr. Gimpel. Mr. Gimpel states that he told Mr. Corlett, in October 2010,
that no funds would be transferred to the Parent Company until a positive tax
ruling was obtained; the request of a tax ruling was not made until January
2012. One glaring problem with this statement is that, in spite of Mr. Gimpel’s
assurances to the contrary, AHLC did transfer $16 million to the Parent
Company in June 2011. Given the transfer of $16 million, it was certainly not
unreasonable for Mr. Corlett to discount Mr. Gimpel’s “promise”.
[17]
An affidavit was also provided by Mr. Ransom. For the most
part, Mr. Ransom’s affidavit is not helpful or relevant to the question before
me. The fact that AHLC was challenging the tax owed for a number of years and
might ultimately be successful does not change the fact that the tax
assessments for those years or for 2010 are valid. Tax assessments are valid
until and unless successfully challenged (Act, above at s 152(8)).
[18]
Mr. Ransom is correct in his statement that CRA is not
“entitled to collect or demand security” for the 2010 tax debt. With all due
respect to Mr. Ransom and to counsel who also made this argument to me, this
misses the point. While CRA cannot legally demand the payment, AHLC was free to
make such payment or give security to assuage the obvious concern of the CRA
that further liquid assets of the company would be whisked into the hands of
the Parent Company. The failure to provide security or payment was one more
“sign” that AHLC wanted to keep the money liquid to facilitate a transfer of more
money to the Parent Company.
[19]
In his original affidavit, Mr. Corlett stated that he had
been told by both Mr. Gimpel and Mr. Ransom that the Trustee “is pressing for
payment”. The Minister acknowledges that the statement was too strongly worded.
I agree. However, while the word “pressing” may have been an over-enthusiastic
interpretation of what Mr. Corlett was told, the situation remains that both
Mr. Gimpel and Mr. Ransom advised Mr. Corlett that the Trustee was looking to
draw funds from AHLC. These facts were clearly set out in Mr. Corlett’s
affidavit and are not disputed. Moreover, the desire of the Trustee to obtain
further money from AHLC adds additional support for the decision to take action
under s. 225.2(2) of the Act.
[20]
The facts outlined above provide ample evidence that AHLC
had the motivation and means to transfer the Funds to the Parent Company.
Considered cumulatively, the evidence does not lead me to doubt the
reasonableness of Justice O’Reilly’s conclusion that there were reasonable
grounds to believe that collection of the 2010 tax debt of AHLC would be
jeopardized by a delay in the collection of that amount. Accordingly, I find
that AHLC has failed to meet its burden at the first stage of the analysis.
[21]
In its written submissions, AHLC submitted that the
Minister had failed to make full and frank disclosure. This argument was not
pursued at the oral hearing. Having reviewed the material, I am satisfied that
there was full and frank disclosure of all relevant and material facts to
Justice O’Reilly.
[22]
In conclusion, the application for review will be dismissed
and the Jeopardy Order will be confirmed.
ORDER
THIS COURT ORDERS that:
1.
The application for review is dismissed, with costs to the
Minister; and
2.
The Jeopardy Order is confirmed.
“Judith A. Snider”
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