Date: 20090429
Docket: T-808-07
Citation: 2009
FC 432
Ottawa, Ontario, April 29, 2009
PRESENT: The Honourable Madam Justice Simpson
BETWEEN:
WILLIAM POON
Applicant
and
HER MAJESTY THE QUEEN
Respondents
REASONS FOR ORDER AND ORDER
[1]
William
Poon (the Applicant) seeks judicial review pursuant to section 18.1 of the Federal
Courts Act, R.S.C. 1985, c. F-7 of a decision
by the Canada Revenue Agency (CRA, the Respondent) made on April 11, 2007,
which determined that the Applicant did not qualify for interest and penalty
relief under the Voluntary Disclosures Program (VDP) administered by CRA under
subsection 220(3.1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th
Supp.).
THE VOLUNTARY DISCLOSURES PROGRAM
[2]
CRA
has the legislative authority to waive or cancel penalties, in whole or in
part, pursuant to various Acts of Parliament. In the present case, the
legislative basis for the VDP is found at subsection 220(3.1) of the Income
Tax Act (the Act), which reads:
|
Waiver
of penalty or interest
(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.
|
Renonciation
aux pénalités et aux intérêts
(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.
|
[3]
CRA’s
Information Circular 00-1R “Voluntary Disclosures Program”, dated
September 30, 2002 (the Circular),
was the document CRA used to inform the public about the program. The Circular
describes the purpose of the VDP as follows:
The purpose of the [Canada Revenue
Agency’s (CRA)] Voluntary Disclosures Program (VDP) is to promote voluntary
compliance with the accounting and payment of duty and tax provisions under the
Customs Act, Customs Tariff, Income Tax Act, and Excise Tax Act. The VDP
encourages clients to come forward and correct deficiencies to comply with
their legal obligations. It is a fairness program that is aimed at providing
clients with an opportunity to correct past omissions, thus rendering
themselves compliant. By offering this opportunity for clients to self-correct,
the program provides a greater level of fairness to all clients and
stakeholders.
[4]
Four
conditions must be met for the voluntary disclosure to be valid: it must be
voluntary, it must be complete, it must involve a monetary penalty and it must
include information that is one year or more overdue or information that is less
than one year overdue, where CRA determines that the disclosure was “not
initiated simply to avoid the late filing or instalment penalties”. As CRA
rejected the Applicant’s disclosure on the basis of non-voluntariness,
subsection 6(a) of the Circular is relevant. It provides as follows:
The disclosure must be voluntary. The
client has to initiate the voluntary disclosure. A disclosure may not qualify
as a voluntary disclosure under the above policy if it is found to have been
made with the knowledge of an audit, investigation, or other enforcement action
that has been initiated by the [CRA], or other authorities or administrations
with which the [CRA] has information exchange agreements.
[5]
CRA
elaborates on the VDP policy in the Voluntary Disclosures Program Guidelines,
also dated September 30, 2002 (the Guidelines). Although there was some dispute regarding
whether the Guidelines are readily available to the public, Wong
v. Canada (Minister of National
Revenue),
2007 FC 628, 314
F.T.R. 119, at
para. 6 [Wong], noted that they were not. The Guidelines outline how VDP
requests are to be handled and assist both VDP officers in their initial
determinations regarding the validity of voluntary disclosures as well as
Directors in their second level reviews of VDP decisions.
[6]
Section
8.3.5 of the Guidelines is titled “Impact of Enforcement Activity on
Determination”. It reads:
Not all enforcement action is automatic
cause to invalidate a disclosure. If any of the above research suggests that
the CRA or a related administration has taken enforcement action against a
disclosing client, partner, or related corporation, the VDP officer will need
to consider whether the disclosure can still be considered voluntary. For
example:
* a source deduction audit may have no
relation at all to a GST disclosure that is being made;
* the CRA may have established an
audit protocol with a large file client and the client may have disclosed a
matter unrelated to the audit.
Therefore, when a VDP officer discovers
that enforcement actions have begun against a client, the following judgments
should be made:
* Was any direct contact made with the
client or is the client likely to have been aware of the enforcement action?
* Is it likely that the CRA would have
uncovered the information being disclosed based on this enforcement action?
If the answer to either of these
questions is "NO", the disclosure may be considered voluntary.
Clients should be given the benefit of the doubt.
[my emphasis]
[7]
Karia
v. Canada (Minister of National Revenue), 2005 FC 639, [2006] 1 F.C.R. 172, at para.
7 [Karia],
provides that the
Circular and Guidelines are not delegated legislation and therefore have no
force of law.
THE FACTS
[8]
The
Applicant is a computer consultant. He is the sole shareholder and
president of
a corporation known as Application
Productivity Services Inc. (APS). The Applicant operates his consulting
business through APS.
[9]
In September of 2005, the Applicant travelled to Hong Kong to propose to his fiancée. The Applicant explained
that his upcoming marriage was the main motivation for
his voluntary disclosure.
[10]
The
Applicant’s personal voluntary disclosure (the Personal Disclosure) provided
that APS was his main source of income in the period from 1995 to 2005 and that
he took draws from APS that were not subject to deductions at source. However,
the personal portion of the request also showed: T4 employment income in 1995,
1997, 1998, 1999 and 2000 from arm’s length companies other than APS, which had
been subject to deductions at source; gross income from rental property, with
undetermined expenses to be deducted; and investment income. Thus, the
Applicant disclosed three sources of income unrelated to APS.
[11]
In APS’s
corporate voluntary disclosure (the Corporate Disclosure), the company disclosed
gross earnings estimated at $1,034,307 under the heading “APS’s undisclosed
income during 1997-2004”. This disclosure noted that the amount was unverified
and had “not taken into account various expenses incurred for earning this
income or the draws taken by Mr. Poon, which may well total all of the
corporation’s net income”. It also noted that APS was in the process of
determining its potential payroll withholding liabilities and undisclosed GST
liabilities.
[12]
On February 8, 2006, CRA informed the Applicant
that his Personal
Disclosure was not voluntary because, before it was
submitted, CRA had contacted him requiring the filing of corporate income tax
returns for APS.
THE DECISION
[13]
On April 11, 2007, the Director of the Toronto Centre Tax Service
Office (the Director), informed the Applicant of CRA’s decision concerning his
request for a second level review under the VDP. The Personal Disclosure was
denied “due to enforcement action.” Reliance was placed in part on a form TX14D
(the Form) dated March 4, 2005 which was directed to APS and which
indicated that:
If you do not file a return within the 30
day period we may issue an assessment under subsection 157(2) of the Income Tax
Act, and further legal action may be taken.
[14]
After
describing other enforcement actions against APS, and the fact that the
Applicant is related to APS by virtue of section 256 of the Act, the Decision
provides:
Under the Voluntary Disclosures Program
guidelines, where there is an enforcement action issued against a corporation
that is related to the taxpayer, based on that enforcement activity the
taxpayer’s voluntary disclosure would be denied. Accordingly, the disclosure
under review is not considered to be voluntary as it was made with the
knowledge to file the corporation’s income tax returns as stated above.
[15]
On May 11, 2007, the Applicant commenced the
present judicial review.
ISSUES
[16]
There
are two issues:
1. Was the Applicant aware that enforcement activity had been commenced
against APS?
2. Was the Decision complete?
STANDARD OF REVIEW
[17]
The
parties submit and I agree that the appropriate standard of review to be
applied to findings of fact in a decision under the Fairness provisions is
reasonableness: Karia at para. 10; Lanno v. Canada (Customs and Revenue Agency),
2005 FCA 153,
2005 D.T.C. 5245 at para. 7. However, matters of procedural fairness such as
Issue 2 are outside the standard of review and decision-makers are entitled to
no deference on such issues: Sketchley v. Canada (Attorney General),
2005 FCA 404, [2006] 3 F.C.R. 392, at paras. 52-54.
Issue 1: Enforcement Action
[18]
The
Applicant’s counsel argued that, when the Applicant made the Personal
Disclosure, he was unaware of enforcement action being taken against APS. In
particular, he said that his client had not received the Form. It is not
necessary to consider all his submissions in this regard because I have
concluded, for the reasons below, that he did receive the Form. It demanded
income tax returns from APS and threatened legal action if they were not filed
within 30 days.
[19]
In his
Decision and in his affidavit for this proceeding, the Director referred to the
Form as an enforcement action. However, it was not mentioned in the
Applicant’s affidavit. One would have expected a denial from the Applicant if
the Form had not in fact been received. Further, when asked about the Form
during his cross-examination, he did not clearly deny its receipt. He was
asked if he was “aware” that the Form was a demand for a tax return, and he replied in the
negative. One would expect that re-examination would have been
undertaken to establish that the Form had not been received, if that had been
the case. However, there was no such re-examination.
Conclusion
[20]
I have
therefore concluded that the Decision in this respect was
reasonable. The Applicant received
the Form and was therefore aware that enforcement action was being taken
against APS.
Issue 2: The Adequacy of the Decision
[21]
The
question is whether, having indicated in the Decision that he was applying the
Guidelines, the Director was required to address section 8.3.5 thereof. It
indicates that “Not all enforcement action is automatic cause to invalidate a
disclosure”.
[22]
As
stated above, the Guidelines suggest, in part, that:
[…] when a VDP officer discovers that
enforcement actions have begin against a client, the following judgments should
be made:
[Question 1] Was any direct contact made
with the client or is the client likely to have been aware of the enforcement
action?
[Question 2] It is likely that the CRA
would have uncovered the information being disclosed based on this enforcement
action?
If the answer to either of these
questions is “NO”, the disclosure may be considered voluntary. Clients should
be given the benefit of the doubt.
[23]
The
Decision refers to the Guidelines and provides fairly detailed reasons for
explaining, in answer to the first question, why the Director concluded that
the Applicant was aware of CRA’s enforcement action against APS.
[24]
What
is missing is any mention in the Decision of the Director’s reasoning and
conclusion about the second question.
[25]
The
Applicant said, with regard to the second question, that any enforcement action CRA took
against APS would not have revealed all the personal sources of income
described in the Personal Disclosure. In particular, he referred to investment
income, rental income and income from employers other than APS.
[26]
The
Director’s failure to deal with the second question in the Decision means that he has not
adequately explained why he exercised his discretion to reject the Applicant’s
Personal Disclosure.
[27]
I should
note that during his re-examination on his affidavit (which does not deal with the second
question), the Director
was asked by his counsel how he answered the first and second questions. The
passage reads as follows:
Q. Now, in this
case what were the answers to those two questions?
A. Was any
direct contact made with the client or is the client likely to have been aware
of the enforcement action? That would have been yes. Is it likely that the
CRA would have uncovered the information being disclosed based on this
enforcement action, yes.
Q. So in this case, did the issue of
giving the client, Mr. Poon, the benefit of the doubt, did that arise?
A. From my review, I personally looked at
this closely, you have to take in the concept of what the voluntary disclosure
program is and it’s to ensure the fact that we are trying to have people
disclose things without incurring a penalty. In some instances, that’s what -
- well, that’s what we are trying to achieve. Unfortunately in this instance,
there was enforcement action against Mr. Poon’s corporation. I looked at it,
do these apply to him, I gave it - - tried, strong consideration.
Unfortunately I could not convince myself that they did.
[my emphasis]
[28]
In my view, answers to questions on re-examination are not
capable of correcting deficiencies in a Decision.
Conclusion
[29]
The Decision fails to provide adequate reasons.
ORDER
THIS COURT ORDERS that:
1.
The
Decision is set aside.
2.
The Applicant’s
Personal Disclosure is to be reconsidered by a Director in another CRA office
and reasons are to be provided in a manner that explains his or her conclusions
about the two questions in the Guidelines and the final exercise of discretion
thereunder.
3.
Costs
are to the Applicant.
“Sandra
J. Simpson”
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