Date: 20070613
Docket: T-1797-06
Citation: 2007 FC 628
Ottawa, Ontario, June 13,
2007
PRESENT: The Honourable Mr. Justice Phelan
BETWEEN:
CHARLIE
WONG
Applicant
and
THE
MINISTER OF NATIONAL REVENUE
Respondent
REASONS FOR JUDGMENT AND JUDGMENT
I. INTRODUCTION
[1]
The
Applicant, thinking he was covered under the Voluntary Disclosure Program
(VDP), disclosed unreported taxable income. He was subsequently advised that he
did not qualify for the Program’s protection. As a result, he will be liable
not only for tax and interest but also penalties and potentially criminal
prosecution.
[2]
This
is the judicial review of the Canada Revenue Agency’s (CRA) decision upholding
the decision to deny Mr. Wong the benefits of the VDP – relief from penalties
and prosecution.
II. FACTUAL
BACKGROUND
A. Overview
of the VDP
[3]
Section
220 (3.1) of the Income Tax Act gives the Minister of National Revenue a
broad discretion to waive or cancel penalties otherwise payable. The purpose of
the VDP is to promote compliance with both the Income Tax Act and the Excise
Tax Act by encouraging the disclosure of information that ought to have
been previously reported. The Minister urges taxpayers to come forward under
the VDP by promising to waive penalties or grant relief from prosecution if the
taxpayer meets the conditions for making a valid disclosure.
[4]
The
VDP has four essential conditions set forth in Information Circular 00-IR:
·
the
disclosure must be voluntary;
·
the
disclosure must be complete;
·
the
disclosure must involve a penalty; and
·
the
disclosure must include information that is at least one year past due or if
less than one year past due, not initiated simply to avoid the late filing or
instalment penalties.
[5]
The
voluntariness condition is described more fully in the Information Circular –
which is available to the public – 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 CCRA, or other authorities or administrations
with which the CCRA has information exchange agreements.
[6]
CRA
also has Voluntary Disclosure Program Guidelines – this publication is not
available to the public. The Guidelines are to assist the officers making
decisions on the validity of voluntary disclosures.
[7]
While
Guidelines are not law, they give information as to government bodies’
thinking, policies and practices. These Guidelines contain a number of
provisions relevant to this judicial review. The starting point is that VDP
officers are required to deal with all facets of the file. Further provisions
detail important steps and rationale.
(a) 8.1.1 General
The VDP officer, like all employees of
the CCRA and the Government of Canada, has a statutory obligation to enforce
the law. Once a client provides the details of a disclosure, the VDP officer
must act on that information. As a result, one of the most important steps in
the voluntary disclosures process is to educate clients on the implications of
making a voluntary disclosure before details of a disclosure are shared. This
step is not only to maintain good client relations and to avoid unpleasant
surprises, it is also a client’s right to understand the possible
implications of making a voluntary disclosure. The “Client Agreement Form”,
VDP-1, in Appendix A is designed to assist in this process and may be used with
all disclosures.
(Underlining by the Court)
(The VDP-1 Form was not used as a matter
of policy in the Saskatoon CRA office)
(b) 8.1.2 Conditions for a Valid
Voluntary Disclosure
… The client must be advised that, if any
conditions that would invalidate a disclosure come to light, the client may
become subject to penalties on the entire amount, and to prosecution, if
applicable.
(c) 8.1.4 Other Questions
The VDP officer should answer any general
questions the client may have, as well as discuss the client’s disclosure
situation in general terms so that the client is fully aware of penalty and
other implications.
(d) 8.3.8 Interim Notification
Within 30 calendar days of the date the
client provided all disclosure information, the client should be notified
whether or not we will consider the disclosure to be “voluntary”. … If the
voluntary decision is being communicated and the disclosure needs to be
referred to Audit for completeness, the client should be made aware that the
current acceptance is conditional based on a further determination of the
completeness of the disclosure.
[8]
The
Guidelines also deal with the situation where a VDP officer discovers that
enforcement action has been taken. The disclosure may still be “voluntary” and
the Respondent puts considerable emphasis on this aspect. The Guidelines
require the VDP officer to consider:
·
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 CCRA 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.
B. Specific
Facts
[9]
In
these proceedings Mr. Wong filed an affidavit setting out the facts from his
perspective and was subject to cross-examination. The Respondent put in no such
evidence from the officers who dealt directly with Wong. This is particularly
important in respect of what was said and done at the time of his disclosure to
CRA officials.
[10]
Wong
ran a sole proprietorship, “Charlie’s Seafood Market”, a retail seafood
business. On September 14, 2005, Ms. Chrun of the CRA informed Wong that his
GST return for the first quarter of 2005 had been selected for audit. It seems
that Wong’s purchase of a Smart Car attracted public attention in the press and
at CRA.
[11]
On
the same day Wong called CRA regarding the VDP which he had heard about on the
radio. He spoke to a representative, whose name he could not recall, who asked
whether he (Wong) was under investigation for fraud. Wong replied “No” and was
instructed to speak to Chrun.
[12]
On
September 15, 2005, Wong contacted Chrun about voluntary disclosure. She
advised him that he would have to see if he qualified. Chrun then contacted
Frank Metanchuk, the VDP officer, as to whether Wong qualified under the VDP.
[13]
Chrun
then telephoned Wong to advise him to check the CRA website and to inform him
that he would not qualify for the VDP for 2005 because there was an audit. From
this call, its nature and content, Wong understood that he qualified for the
VDP for the years other than 2005. His affidavit evidence is that Chrun told
him that since she was reviewing the 2005 year, he did not qualify for the VDP
for 2005 but that disclosing for period prior to 2005 would be “okay”. There
was no warning as to the negative consequences associated with making a
voluntary disclosure.
[14]
The
following day Wong contacted Metanchuk to inform him that he wanted to make a
voluntary disclosure. Wong was given no warning nor was he advised that
voluntariness might be an issue despite CRA officials’ knowledge of all the
facts concerning the existence of the 2005 audit. Lastly, Wong was not asked to
sign or advised of the existence of the VDP-1 form. It was not the practice of
the Saskatoon office to
use this form of consent.
[15]
Wong,
having said that he qualified for the VDP and having received no indication of
any problems about his qualification, proceeded to disclose that he had
unreported income for the years 2000-2004 from his wholesale business.
[16]
On
the same day Wong formalized his request for inclusion in the VDP on the
assumption that he had met the test of “voluntariness” for the years other than
2005. Given what had transpired, Wong understood that his only area of risk in
regard to the Program was ensuring that he made complete disclosure.
[17]
Thereafter,
Wong had several meetings and discussions with CRA officials which, from Wong’s
perspective, were centred on ensuring that his disclosure was complete.
[18]
The
first hint of possible trouble was on December 7, 2005 when Metanchuk informed
Wong that disclosure might not qualify because of recent enforcement action.
[19]
On
June 1, 2006, Wong was advised that he did not qualify for the VDP because
enforcement action had begun prior to his disclosure. In the briefing notes for
this First Decision, in the recitation of the facts, there is no reference to
the assurance that disclosure for other years would be “OK” nor is there any
reference to the failure to follow the Guidelines as to warnings and
consequences of disclosure. There is a somewhat equivocal finding that the
auditor would have uncovered the information in the course of the audit.
[20]
Wong
then sought a Second Level Review. That review was a paper review – a review of
the file. In order to prepare the recommendation, the person conducting the
paper review never interviewed any of the participants but discounted Wong’s
version of events because the file notes did not coincide with his evidence.
[21]
The
Second Level Review Decision confirmed the First Decision, denied that CRA
officials misled Wong and concluded that it was the auditor’s contact which had
motivated disclosure of unreported income.
[22]
This
is the decision which is subject to judicial review.
III. ANALYSIS
[23]
The
parties have raised several issues which can be more conveniently described as:
(a) Whether
an adverse inference can be drawn from the Respondent’s failure to provide
evidence from persons with personal knowledge of the facts.
(b) Was
the decision reasonable?
(c) Was
there a breach of procedural fairness?
(d) Was
there a breach of contract between CRA and Wong?
(e) Is
CRA estopped from denying Wong’s request for relief?
(f) Was
the information disclosed on a “without prejudice” basis?
A. Standard
of Review
[24]
If
this case were to turn on the decision itself rather than how it came about,
the standard of review would be “reasonableness” (see Lanno v. Canada (Customs and
Revenue Agency), [2005] F.C.J. No. 714 (QL)). However, this case turns on
how Wong was treated which raises issues of law and fairness for which the
standard is correctness.
B. Adverse
Inference
[25]
This
is not a situation where the Court need draw an adverse inference from the
Respondent’s failure to file evidence to rebut Wong. The Respondent’s choice
not to challenge Wong’s evidence by contrary evidence simply means that,
subject to admissions on cross-examination, Wong’s evidence is the only
evidence on the issues of estoppel and fairness.
[26]
The
Respondent’s choice not to interview any of the key government participants in
the face of Wong’s allegation raises issues as to the quality of the Second
Level (and First) Decision.
C. Fairness
[27]
The
overriding issue in Wong’s disclosure is its voluntariness including whether he
knew or ought to know the consequences of his disclosure. The CRA Guidelines
are replete with references to ensuring that people are treated fairly and know
their rights before making disclosure.
[28]
The
Saskatoon office did
not follow those Guidelines. While they are entitled to ignore the Guidelines, they
do so at their peril. The simple presentation of the VDP-1 form might have
eliminated all the problems in this proceeding.
[29]
The
level of procedural fairness owed is minimal but, as is recognized in the
Guidelines, a person is entitled to know the consequences of what they are about
to embark upon before they take an irretrievable step. Wong received neither the
warnings nor the advice that the Guidelines call for. That failure to accord
minimal fairness led to the highly prejudicial disclosure.
[30]
CRA
officials could have been under no illusions that Wong believed he was entitled
to VDP protection when he made his disclosure on September 16, 2005. To sit
silently by and allow Wong to continue under this illusion, as he attempted to
provide complete disclosure, until December 7, 2005 when “voluntariness” was
raised as a possible issue was profoundly unfair. However, the key point was on
September 16, 2005, because after that encounter the “genie could not be put in
the bottle” – CRA knew about his wholesale business and some of his customers.
D. Decision/Reasonableness
[31]
The
conclusion that Wong made his disclosure because of a forthcoming audit avoids
the critical issue and analysis. That conclusionary analysis stops at the
question of why Wong approached CRA. The analysis did not include a thorough
review of his reasons for making the actual disclosure – that he was induced to
make this disclosure. As of September 16, 2005, CRA knew all the facts about
the existence of an audit; the only critical fact outstanding was completeness.
[32]
Given
that Wong alleged inducement, a file review without interviews of the active
participants at the critical time and the finding that Wong’s recitation of the
facts was in error because they are not reflected in file notes, is
unreasonable.
[33]
The
finding that the auditor would have found the undisclosed evidence is an easy
finding to make in hindsight. It is not immediately obvious that an audit of
GST credits would reasonably lead to the undisclosed income but, on this point,
the CRA has greater expertise than this Court. Scepticism is not sufficient in
this case to lead to a conclusion that this finding is unreasonable.
E. Estoppel
[34]
The
applicability of the principles of promissory estoppel in the context of VDP
disclosure has been confirmed by Strayer D.J. in Karia v. Canada (Minister of
National Revenue – M.N.R.) (F.C.), 2005 FC 639.
[35]
The
requirements of promissory estoppel are (1) a promise that the promisor will
conduct himself in a certain way in given circumstances; (2) reliance on that
promise; and (3) action on the promise to the promisee’s detriment/or
promisor’s benefit.
[36]
The
promise is contained in the Information Circular, in the comments by Chrun, and
is compounded by the knowing silence of Metanchuk when Wong said he qualified
and then began to make disclosure. If there was any serious doubt that the
audit, its existence known to these officials, might be an impediment, they
could and should have disclosed that fact.
[37]
CRA
officials knew (or ought to have known) that Wong believed that, except for the
audit which eliminated 2005 from the VDP protection, he was under the VDP as
long as he kept his end of the bargain and made complete disclosure.
[38]
While
the facts in Karia are different where the taxpayer had a letter
indicating conditional acceptance into the program, the essential qualification
of a promise exists in Wong’s case; partly in writing, partly orally and lastly
by acquiescence.
[39]
The
Respondent suggests that Wong was knowledgeable about the VDP when he made
contact and presumably knew all the risks of disclosure. It is unreasonable to
conclude that a person knowledgeable about the VDP (and therefore knowledgeable
that there was an issue of voluntariness) would commit tax “suicide” and
confess to undisclosed income without a belief that he had obtained a promise
of protection.
[40]
There
is no suggestion of any other grounds to deny Wong protection under the VDP.
[41]
This
issue can be determined in two ways:
(1) that
the existence of promissory estoppel is a matter of law to which no deference
is owed. The legal conditions for its application are met.
(2) that
the finding that Wong was misled is at least a question of mixed law and fact
and the finding that Wong was not misled is unreasonable or if greater deference
is owed, the decision of the Respondent is patently unreasonable.
IV. CONCLUSION
[42]
I
need not decide the issues of contract or “without prejudice disclosure”. They
were also not issues raised in the Second Level Review.
[43]
I
therefore find that the Respondent is estopped from denying that the Applicant
is entitled to be considered as having met condition 6(a) of the Information
Circular 00-IR in effect on September 16, 2005.
[44]
This
application for judicial review will be granted with costs, the decision of
September 11, 2006 will be quashed, and the matter remitted back with a
direction that the disclosures of the Applicant be treated as voluntary and his
request for inclusion in the VDP be re-determined on that basis.
JUDGMENT
THIS COURT
ORDERS AND ADJUDGES that this
application for judicial review is granted with costs, the decision of
September 11, 2006 is quashed, and the matter is remitted back with a direction
that the disclosures of the Applicant are to be treated as voluntary and his
request for inclusion in the VDP is to be re-determined on that basis.
“Michael
L. Phelan”
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