Date: 20110411
Docket: T-1450-10
Citation: 2011 FC 446
Toronto, Ontario, April 11, 2011
PRESENT: The Honourable Mr. Justice Hughes
BETWEEN:
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VITOL REFINING S.A.
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Applicant
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and
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ATTORNEY GENERAL OF CANADA
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Respondent
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REASONS FOR JUDGMENT AND
JUDGMENT
[1]
This
is an application by Vitol Refining S.A. for judicial review and consequent
relief in respect of a decision made by the Canada Revenue Agency (CRA) as
communicated to Vitol’s lawyers by a letter dated August 10, 2010. That
decision was not to reverse the CRA’s assessment that “arrears interest” was
payable by Vitol in respect of certain GST/HST transactions disclosed by Vitol
to the CRA under the Voluntary Disclosures Program (VDP).
[2]
For
the reasons that follow, I find that the application is dismissed with costs to
the Respondent fixed in the sum of $1750.00.
FACTS
[3]
The
Applicant Vitol (also referred to as VRSA) sells petroleum products in Canada including
what is described as feedstock. Vitol is registered with the CRA for GST/HST
purposes. GST (Goods and Services Tax) is a tax imposed by the federal
government and is calculated as a percentage of the monetary value of the
transaction. HST (Harmonized Sales Tax) is a similar tax which includes GST
plus a tax imposed by a provincial government, but is collected by the federal
government. Depending on agreements entered into at certain times between the
federal government and certain provincial governments, HST is imposed in
respect of transactions occurring in certain provinces as of certain dates, but
is not uniformly imposed in all provinces as of any particular date. A vendor
such as Vitol is required to collect from its customers the GST or HST
applicable to any transaction depending on the date and province in which it
occurs. If the customer resells the product and is registered with the CRA for
GST/HST purposes, it in turn must collect the applicable GST/HST from its
customers. Through a scheme known as input tax credits, the Vitol customers can
recover the GST or HST that it paid to Vitol. Since the monies paid go in and
out of the hands of the CRA relatively quickly such transactions are sometimes
called wash transactions.
[4]
In
the period from October 2006 to April 2007, Vitol sold feedstock in Newfoundland to a
customer registered for GST/HST purposes. That customer refined the feedstock
and sold the refined product to others and charged the applicable GST/HST.
Vitol, however, collected only the GST (6%) on the feedstock that it sold to
that customer. Given the dates and location of the transaction, Vitol should
have charged HST (14%) on the sale price. Vitol quickly realized its error and
made a voluntary disclosure to CRA. The sum in question was large, the
difference between GST and HST amounted to over one hundred and one million
dollars. The dispute between the parties does not arise in respect of this
amount. Rather, the dispute arises as to interest payable. No penalties were
imposed.
[5]
There
are two kinds of interest that are the subject of considerable correspondence
between the CRA and lawyers and accountants for Vitol. One kind has been
resolved, the other remains at issue in these proceedings. The one that has
been resolved is termed as “wash transaction interest”. The one that remains
unresolved is termed as “arrears interest”. Unfortunately, it appears that in
some of the correspondence these terms have been incorrectly or interchangeably
used, although that seems to have been straightened around at the end.
[6]
The
terms “wash transaction interest” and “arrears interest” have been defined by
the Applicant in paragraph 3 of the Grounds portion of its Notice of
Application as follows:
Wash Transaction Interest: Interest
relating to the period between the date on which tax should have been remitted
by the taxpayer and the date the Notice of Assessment is issued.
Arrears Interest: Interest relating to
the period between the date the Notice of Assessment is issued and the date on
which the tax is remitted by the taxpayer.
[7]
The
amount of the “arrears interest” that is in dispute amounts to one million,
nineteen thousand, five hundred and seventy-five dollars ($1,019,575.00). Vitol
has paid that amount to CRA. The issue is whether CRA should reconsider its
requirement that this amount or a portion should be paid in the circumstances.
[8]
Both
parties argue that the unique facts of this case require that special
consideration be given as to whether or not interest otherwise payable should
have been waived by the CRA. Each party submitted affidavit evidence with
attached exhibits. Vitol submitted the affidavit of John Zimmerman, Vice
President – Compliance. The Respondent submitted the affidavit of Brian Miklos,
Assistant Director of the Enforcement Division of the East Central Ontario Tax
Services Office of the CRA. Neither affiant was cross-examined.
[9]
The
relevant facts as set out in those affidavits and exhibits are:
a. October 1,
2006 to April 30, 2007, Vitol failed to collect from its customer, North
Atlantic Refining Limited (NARL) and remit to CRA the provincial portion of the
HST, amounting to $101,336,891.00;
b. Ernst &
Young LLP (E & Y), an accounting firm acting for Vitol, submitted a no-name
voluntary disclosure to CRA on behalf of Vitol in respect of the unpaid taxes;
c. October 23,
2007, E & Y disclosed Vitol’s name and other particulars to CRA respecting
the voluntary disclosure;
d. December 21,
2007, the CRA sent a letter to a named individual at E & Y who, as it now
appears, had left E & Y by that time, stating that the submission had been accepted
as a valid voluntary disclosure and requesting that certain information and
records be sent to CRA’s St. John’s Tax Centre;
e. It appears
that the December 21, 2007 letter never reached the intended recipient at E
& Y and was eventually returned to CRA, unopened, on June 12, 2008;
f.
March
18, 2008, CRA faxed a copy of the December 21, 2007 letter to E & Y. No
response was apparently made;
g. May 21, 2008,
CRA made a reassessment as to GST/HST owing and sent it directly to Vitol. This
reassessment confused wash interest with arrears interest;
h. June 5, 2008,
CRA sent a further reassessment of GST/HST to Vitol. Again wash interest and
arrears interest were confused;
i.
June
12, 2008, CRA sent another copy of the December 21, 2007 letter to E & Y;
j.
June
19, 2008, CRA sent yet a further reassessment of GST/HST to Vitol. Again, wash
interest and arrears interest were confused;
k. June 23,
2008, CRA sent a further reassessment of GST/HST. Again, wash interest and
arrears interest were confused;
l.
June
27, 2008, Vitol secured from its customer, NARL, a Direction addressed to the
CRA that the first $101,336,891.22 of the net tax refund owing by CRA to NARL
be paid in satisfaction of the amount owing by Vitol. Vitol filed this
Direction with the CRA the same day;
m. At the hearing,
while it is not clearly in evidence, Counsel for both parties agreed that, the
same day, June 27, 2008, a representative of CRA spoke on the telephone with
one of Vitol’s lawyers and advised that CRA did not accept such a Direction;
n. July 10, 2008,
NARL (who had apparently received from CRA the funds representing its tax
credit on July 7, 2008) paid CRA the amount owing by Vitol, $101,336,891.22;
o. Throughout, there
were frequent conversations and telephone calls between the CRA and Vitol’s
lawyers;
p. January 28,
2009, Vitol’s lawyers wrote to CRA requesting a second administrative review of
both wash interest and arrears interest;
q. December 3,
2009, eleven months later, CRA responds. The “wash interest” assessment was
reversed but not the arrears interest;
r.
December
21, 2009, Vitol’s lawyers responded to CRA’s letter of December 3, 2009 with
recalculations as to the quantum of the arrears interest, reviewing the
circumstances and requesting that the decision to charge arrears interest be
reversed;
s. March 31,
2010, CRA published revised Guidelines as to waiver of interest and penalties
respecting GST/HST replacing Guidelines in place since 2000;
t.
August
10, 2010, CRA sent a letter to Vitol’s lawyers declining to reverse its
decision as to arrears interest and recalculating the sum in question. This is
the decision at issue here;
u. September 2,
2010, CRA sent a Statement of Arrears to Vitol including lengthy calculations;
v. These
proceedings were launched.
[10]
The
decision under review is set out in CRA’s letter to Vitol’s lawyers dated
August 10 2010. The first page of that letter reviews some of the background
and confirms that wash interest had been forgiven. It also confirms a
recalculation by CRA of arrears interest at an amount lower than that
calculated by Vitol. The arrears interest now at issue is $1,019,575.24.
[11]
The
second page of the letter of August 10, 2010 sets out the basis for CRA’s
refusal to forgive arrears interest. It says:
In Part B of your letter, you make
essentially two points as follows:
i.
At
some point in time, a letter sent from CRA to E & Y was returned to CRA
unopened and this somehow prevented E & Y from being aware of the pending
reassessments and delayed the ITC claim. According to your letter, the ITC
claim was made by NARL on June 18 and they received their refund on July 7,
2008 – a delay of about 20 days. The returned decision letter that you refer to
was dated December 21, 2007 and faxed to E & Y on March 18, 2008 to the
attention of Shawn Starks. This was well before the reassessment date and had E
& Y moved forward with the ITC claim at that time, it is likely that the
refund would have been issued before the May 15, 2008 posting date.
ii.
NARL
filed a Direction with CRA that authorized and directed CRA to apply NARL’s net
tax refund into Vitol’s GST/HST account. According to our records, on June 27,
2008, Dale Hill at Gowlings was advised by Michele Locke of CRA that we do not
accept such Directions.
In the normal course of business, HST
registrants must fund the cash-flow requirements to meet the payment
obligations for taxes when due. This is no different than their obligation to
pay for inventory – often in advance of being paid by their client. Typically,
failure to pay when due attracts interest costs. In this case, the fact that
the net tax was not paid when due attracted arrears interest. With respect to
HST, it is the normal course that there is a time lag between when the
liability for tax occurs and when the input tax credit is paid out and the
Crown is the beneficiary of the time value of the money. This is the normal
course of business and there is nothing peculiar to the facts in this case that
would propel me to grant your request to reverse the arrears interest.
The circumstances of this case have been
carefully considered and as detailed above all interest has already been
reversed with the exception of the arrears interest between the posting of the
transaction and the date of payment and this interest amount is less than what
was calculated in your submission. No further adjustments are warranted.
[12]
Counsel
for Vitol requests that this decision be quashed and that either CRA be
directed to reverse the arrears interest payable by Vitol or that the matter be
returned to CRA for reconsideration by different persons.
ISSUES
[13]
Vitol
in its written memorandum articulated three issues and a number of subsidiary
issues which were elaborated upon at the hearing through Counsel:
1.
What
is the standard of review?
2.
Did
the CRA unreasonably fetter its discretion?
3.
Did
the CRA err in failing to consider the unique circumstances of this case in
exercising its discretion?
GENERAL
CONSIDERATIONS
[14]
The
Excise Tax Act, RSC 1985, c. E-15, as amended, makes provision for the
collection of GST and HST in respect of a number of transactions. Section 280. (1)
provides that interest is to be paid on any amount that a taxpayer fails to
remit or pay. Section 281.1 provides that the Minister may waive or
cancel such interest:
280. (1) Subject to this section and section 281, if a person
fails to remit or pay an amount to the Receiver General when required under
this Part, the person shall pay interest at the prescribed rate on the amount,
computed for the period beginning on the first day following the day on or
before which the amount was required to be remitted or paid and ending on the
day the amount is remitted or paid.
. . .
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.
[15]
The
CRA has from time to time published Guidelines as to how, acting on behalf of
the Minister, it would deal with waiver or cancellation of interest. In
September 2000, it published Guidelines which were directed to, among other
things, wash transactions and voluntary disclosure. Section 10 provided:
Voluntary disclosure – Where a voluntary
disclosure involving a wash transaction has been made and is accepted by the
CCRA as a valid disclosure in accordance with GST Memorandum 500-3-4, Voluntary
Disclosure (to be re-issued as GST/HST Memorandum 16.5), the 4% penalty will
not be applied to the transaction identified as a wash transaction and reported
in the course of a voluntary disclosure. In such circumstances, only the taxes
that should have been collected originally by the supplier for that transaction
will be sought by the CCRA.
[16]
On
March 31, 2010, those Guidelines were amended. Section 10 was replaced by
Section 11 which adds that interest will be assessed on arrears:
11. Where a disclosure
involving a wash transaction has been made and is accepted by the CRA as a
valid disclosure in accordance with IC00-1R2, Voluntary Disclosures Program,
the interest and penalty will first be reduced to a penalty of 4% of the
transaction amount at the time of assessment. This 4% penalty will not be
applied to the transaction identified as a wash transaction and reported in the
course of a disclosure pursuant to the Voluntary Disclosures Program. In such
circumstances, up to the date of assessment, only the taxes that should have
been collected originally by the supplier, or the ITCs not accounted for
properly for that transaction, will be sought by the CRA. Any amount of the
assessment that is unpaid on the date of assessment will then be subject to
normal interest under section 280 from the date of assessment until the date the
outstanding amount is paid.
[17]
Another
matter for consideration is whether the CRA was correct in refusing to accept
the Direction from NARL that tax credits owing to it should be applied to
Vitol’s indebtedness. Respondent’s Counsel argued that the authority for this
refusal is to be found in section 229.(1) of the Excise Tax Act, supra,
which states that a refund should be paid to the person claiming the refund and
in section 26 of the Financial Administration Act, RSC 1985, c.F-11 as
amended, which says that funds can only be paid out as authorized by Parliament
.Section 229.(1) of the Excise Tax Act reads:
229.(1) Payment of net tax refund – Where a net tax refund
payable to a person is claimed in a return filed under the Division by the
person, the Minister shall pay the refund to the person with all due dispatch
after the return is filed.
[18]
Section
26 of the Financial Administration Act reads:
26. Subject to the
Constitution Acts, 1867 to 1982, no payments shall be made out of the
Consolidated Revenue Fund without authority of Parliament.
[19]
The
CRA should not have concluded that these provisions prevent it from
acting on a Direction such as the one tendered here. In a normal commercial
transaction, a Direction such as this would be honoured. There is no explicit
statutory or regulatory provision one way or the other as to how CRA is
to react to a Direction. It is to be noted that in cases such as Union Gas
Ltd. v Minister of National Revenue, [1991] l CTC 1 (FCA) and Wannan v.
R, 2003 FCA 423, the Court considered it to be acceptable that a taxpayer
could direct that funds be reallocated as against various tax liabilities that
were owed by that tax payer. While these cases deal with various liabilities
owed by the same taxpayer, they demonstrate that a degree of flexibility should
be afforded by the CRA in considering such matters.
ISSUE #1 What is
the standard of review?
[20]
Counsel
for the Attorney General argues that the standard is reasonableness. Counsel
for the applicant argues that the standard of reasonableness would apply unless
the Court finds that CRA unreasonably fettered its discretion. This leads to
the second issue.
ISSUE #2 Did the
CRA unreasonably fetter its discretion?
[21]
Vitol’s
Counsel argues that the CRA unreasonably fettered its discretion by applying
the 2010 Guidelines as to Voluntary Disclosure and Wash Transactions, which
expressly state that interest will be charged on arrears instead of the 2000
Guidelines, which are silent on the subject. In this regard, I drew both
Counsel’s attention to the decision of this Court in Brunico Communications
Inc. v Canada (Attorney General) 2004 FC 642, where the Minister of
Canadian Heritage in considering a program designed to support certain kinds of
magazines considered new guidelines that had come into force during the period
while the matter was under consideration. No notice had been given to the party
in question. Von Finckenstein J. (as he then was) wrote at paragraphs 19 to 22:
19 During
the summer and fall of 2001, the Minister held consultations and, as a result,
adopted a definition for newspapers in January 2002. But instead of applying it
to the next funding cycle, the Minister applied it to the existing funding
cycle and to applications already in the pipeline. In effect, the Minister
applied the rules set out in the Applicant's Guide for 2002-2003 to
applications received for 2001-2002. Or, to put it another way, for 2001-2002,
the Minister published a guide that set out one set of rules and then applied
another.
20 This
violated both the most elementary rule of procedural fairness (an applicant
should know the case he has to meet) and violated the legitimate basic
expectation held by the applicant (that the Minister would act in accordance
with her own published Guide).
21 It
is no defense, as counsel for the respondent argued, that there was no
opportunity for applicants to comply once the new system was adopted. Where one
runs a program, such as the Support for Editorial Content Grant Program, in
which past performance determines an applicant's eligibility for future
benefits, one cannot change the rules in midstream without there being any
transitional provisions or without giving applicants advance notice. No matter
how broad the discretion of the Minister is, elementary procedural fairness
demands that where the Minister publishes program rules for a given cycle she
apply the same.
22 The
decisions of Marie France Gosselin, made in the name of the Minister of
Canadian Heritage on March 18th, 2002 in respect of the applications of Brunico
for funding in respect of Strategy and Playback are, therefore, set aside. The
matter is referred back to Canadian Heritage to be determined in accordance
with the rules set out in the Applicant's Guide for 2001-2002 so that Brunico,
in respect of Strategy and Playback (if they otherwise qualify), can receive
the amounts that they would otherwise would have been awarded without the
adoption of the new rules on January 25th, 2002.
[22]
Counsel
for the CRA argues that one only has to look at the letters written by Vitol’s
lawyers such as that of a January 28, 2009 to appreciate that Vitol was well
aware that arrears interest was to be paid and that waiver was a discretionary
matter. At no time, even under the 2000 Guidelines, were Vitol or its lawyers
under any misapprehension that interest was to be paid and waiver was
discretionary.
[23]
The
question as to fettering of discretion has been considered in cases such as Gandy
v Canada (Customs and
Revenue Agency), [2006] 5 CTC 109, 2006 FC 862 at paragraph 28 and 3500772
Canada Inc. v Canada (MNR), [2008], 1 CTC 1, 2008 FC 554 at paragraph 43
without an express discussion as to whether that issue is to be considered on a
“correctness” or a “reasonableness” standard. No consideration of the Supreme Court
of Canada decision in Dunsmuir v New Brunswick [2008], 1 SCR
190 was made.
[24]
In
Waycobah First Nation v Canada (Attorney General), 2010 FC 1188,
Justice de Montigny of this Court considered that a matter that was not of
central importance and not outside the expertise of the administrative decision
maker should be reviewed on a standard of reasonableness. He wrote at paragraph
23:
23 The
argument revolving around the fettering of discretion, on the other hand,
raises a question of law. In essence, the Applicant argues that the CRA
Assistant Commissioner did not properly apply the test for remission set out in
the Financial
Administration Act and failed to take the public interest into
account, and rather chose to elevate the CRA guidelines to the level of law.
Such a fettering of discretion, if it is established, would clearly amount to a
reviewable error of law: see, for ex., CBC v. Canada (Copyright Appeal
Board); 30 C.P.R.(3d) 269, [1990] F.C.J. No. 500 (F.C.A.).
That being said, it is not a question of law that is of "central
importance to the legal system...and outside the ...specialized area of
expertise" of the administrative decision maker: Dunsmuir, above, at
para. 55. As such, it must therefore be reviewed against a reasonableness
standard.
[25]
In
the present circumstances, there is nothing in the Record to suggest that the
CRA acted upon the 2010 Guidelines and not the 2000 Guidelines. The Record
indicates that Vitol’s lawyers were clearly aware that the waiver of arrears
interest was something that the CRA had to consider as a discretionary matter.
[26]
I
am satisfied that the CRA did not fetter its discretion.
ISSUE#3 Did the
CRA err in failing to consider the unique circumstances of this case in
exercising its discretion?
[27]
Vitol’s
Counsel argues that the CRA failed to give sufficient consideration to the
unique circumstances of this case, as a result of which, the decision not to
waive arrears interest was unreasonable. Among the factors said to make the
circumstances unique are:
a. the amount of
unpaid taxes is very large, over a hundred million dollars;
b. the
transaction is a wash transaction, the CRA is not really “out of pocket”;
c.
Vitol
made a Voluntary Disclosure and cooperated fully with the CRA;
d.
the
matter got off to a bad start with miscommunication with E & Y. This was
not Vitol’s fault;
e.
Vitol
had offered a viable solution in presenting the Direction from NARL to CRA that
funds owing to is should be paid to the credit of Vitol.
[28]
The
Minister’s Counsel urges that the CRA did take into account the whole of the
circumstances, including:
a.
the
sum of over a hundred million dollars was unpaid for some 51 days after the
assessments were made and notified to Vitol;
b.
the
Direction was, in the very least, not a usual practice and CRA’s unwillingness
to accept it was communicated to Vitol the same day that it was submitted;
c.
the
CRA did forgive penalties and wash interest, as well as recalculate arrears
interest to a lower amount in Vitol’s favour;
d.
Vitol
did not demonstrate any unusual hardship or demonstrate that it could not come
up with the monies owing.
[29]
I
am satisfied that the CRA gave ample opportunity to Vitol to make submissions
and that those submissions were fairly considered. The matter of forgiveness of
interest is a matter for the CRA’s discretion, provided that such discretion is
exercised fairly and reasonably. There is nothing in this case to suggest that
the CRA overlooked or misunderstood any important consideration.
[30]
The
well known statements by the Supreme Court in Dunsmuir, supra, apply in
these circumstances. I quote paragraphs 46 and 47:
46 What
does this revised reasonableness standard mean? Reasonableness is one of the
most widely used and yet most complex legal concepts. In any area of the law we
turn our attention to, we find ourselves dealing with the reasonable,
reasonableness or rationality. But what is a reasonable decision? How are
reviewing courts to identify an unreasonable decision in the context of
administrative law and, especially, of judicial review?
47 Reasonableness
is a deferential standard animated by the principle that underlies the
development of the two previous standards of reasonableness: certain questions
that come before administrative tribunals do not lend themselves to one
specific, particular result. Instead, they may give rise to a number of
possible, reasonable conclusions. Tribunals have a margin of appreciation
within the range of acceptable and rational solutions. A court conducting a
review for reasonableness inquires into the qualities that make a decision
reasonable, referring both to the process of articulating the reasons and to
outcomes. In judicial review, reasonableness is concerned mostly with the
existence of, justification, transparency and intelligibility within the
decision-making process. But it is also concerned with whether the decision
falls within a range of possible, acceptable outcomes which are defensible in
respect of the facts and law.
[31]
The
decision of the CRA was within the range of reasonable possible decisions. It should
not be set aside by the Court.
CONCLUSION
AND COSTS
[32]
In
the result, the application will be dismissed. Respondent’s Counsel suggested
costs fixed in the sum of $1,750.00. I agree as to that amount and will so fix
the costs.
JUDGMENT
FOR THE REASONS
provided:
THIS COURT’S JUDGMENT
is that:
1.
The
application is dismissed; and
2.
The
Respondent is entitled to recover costs fixed in the sum of $1,750.00.
"Roger
T. Hughes"
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