Date:
20130301
Docket:
T-533-12
Citation:
2013 FC 96
Ottawa, Ontario, March 1, 2013
PRESENT: The Honourable Mr. Justice O'Keefe
BETWEEN:
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CPNI INC.
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Applicant
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and
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THE MINISTER OF NATIONAL
REVENUE
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Respondent
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REASONS FOR
JUDGMENT AND JUDGMENT
[1]
This
is a judicial review of the Minister of National Revenue’s (the Minister) decision
to deny in part CPNI Inc.’s (the applicant or CPNI) request under subsection
220(3.1) of the Income Tax Act, RSC 1985, c 1 (5th Supp) (the Act) to
cancel penalties and interest in respect of the 2008 and 2009 tax years.
[2]
The
applicant seeks an order requiring the Minister to review the application.
[3]
Both
the applicant and the respondent have asked for costs.
Background
[4]
The
applicant is a Toronto corporation who requested taxpayer relief from interest
for the years 2008, 2009 and 2010 on the basis of inability to pay. In its
request, CPNI describes its financial results as losses of $6,411,745 in 2008,
$5,211,187 in 2009 and $1,663,451 in 2010. The amount of relief requested was
$116,000.
[5]
The
applicant described itself as developing a new product line targeted at the
banking community. During the time period covered by the request, the
applicant’s target customers were negatively affected by the mortgage lending
crisis in the United States. This resulted in large banks reducing spending and
terminating new programs. This resulted in reluctance among external investors
to commit funds to the technology sector and especially services aimed at the
banking industry. During the covered period, the applicant accrued
approximately $690,000 in arrears to the Canada Revenue Agency (CRA) by failing
to remit withholding taxes of employees.
[6]
The
applicant had since managed to pay a substantial portion of this amount. Of the
remaining balance of approximately $232,000, approximately $116,000 was
attributable to accrued interest and penalties. The applicant was then
beginning to expand employment and required financing and requested the
government’s help in making progress. The applicant noted all of its revenues
came from offshore accounts and created employment in Canada. The request was received on February 21, 2011.
First Decision
[7]
The
first decision was made by the team leader (the decision maker) at the Taxpayer
Relief Centre of the Expertise Appeals Branch on October 21, 2011. The decision
only dealt with the 2008 and 2009 taxation years as no penalty or interest was
charged for the 2010 taxation year.
[8]
The
decision maker set out the circumstances under which the CRA exercises its
discretion to waive or cancel penalties and interest: (1) if the penalty or
interest has resulted from extraordinary circumstances; (2) is due mainly to
the actions of the CRA; or (3) there is an inability to pay. The decision maker
noted the CRA may also grant relief requests not falling into any of these
three categories.
[9]
The
decision maker noted that in applying the taxpayer relief provisions, the CRA
will consider whether or not the taxpayer: (1) has a history of voluntary
compliance with tax obligations; (2) knowingly allowed a balance to exist; (3)
exercised a reasonable amount of care; and (4) acted quickly to remedy any
delays or omissions.
[10]
The
decision maker then explained that after carefully considering the applicant’s
case, she had concluded it would not be appropriate to grant relief because a
review had failed to show that the corporation was prevented from complying due
to an inability to pay. This was based on three facts:
1. In 2010, there
was a disposal of assets. Therefore, the applicant gave preference to other
debtors over the CRA.
2. In 2010, the
applicant acquired short term assets of $3,225,261.
3. In 2009, there
was a loan or advances due from related parties of $3,054,790.
[11]
The
remainder of the decision dealt with arranging payment and explained that a
second review could be requested.
[12]
The
certified tribunal record shows that a taxpayer relief fact sheet was filled
out during the first decision and appears to be prepared by a subordinate of
the team leader. This document showed an outstanding balance of $54,601.77. The
fact sheet repeated the grounds on which the applicant had requested relief and
analyzed the factors listed above, noting that (1) not all remittances had been
filed on time; (2) the taxpayer had knowingly allowed a balance to exist upon
which arrears interest accrued; and (3) the taxpayer had been negligent or
careless in conducting its affairs under the self-assessment system.
[13]
The
fact sheet also showed that there was no payment arrangement in place and that
the following financial statements indicated there was no inability to pay. In
2009, there were current assets of $3,225,261. In 2009, there was a disposal of
assets of $34,180 and in 2008, there were loans or advances due from related
parties of $3,054,790.
[14]
The
remainder of the fact sheet repeated the recommendation against relief for the
reasons listed in the decision.
Application for Review
[15]
The
applicant requested a review in two letters dated October 21, 2011 and November
14, 2011.
[16]
The
first letter disputed the factual findings of the first decision. The applicant
argued that it had not disposed of assets in 2010, but rather had depreciated
its assets. The applicant noted it ran an operating deficit of $1,658,106 for
2010 and had obtained funds from shareholders and a lender. It paid the CRA
$688,439. This was contrary to the decision’s finding that the applicant
acquired short term assets.
[17]
The
applicant disputed the decision’s finding that there were advances due from a
related party in 2009. The applicant submitted that there was no ability to
realize funds from its inter-company account with its United States company as
the amount referred to in the decision was in respect of accumulated losses
over a number of years in that corporation, not accumulation of funds in the U.S.
The applicant also complained that the CRA had not contacted CPNI to
investigate this issue.
[18]
The
second letter dealt with procedural issues. It requested that the file be
transferred to Summerside for review, since the team leader had signed off on
the first decision, it would be difficult for a subordinate to question its
validity. The applicant also complained of the duration of the review process
and the resultant planning difficulties for the applicant. Finally, the
applicant noted the most important fact in its request for relief was that it
had lost $14 million between 2008 and August 2011, a terrifyingly large amount
of money for a small company and that the decision had made no reference to
this fact.
Second Decision
[19]
This
is the decision under review in this Court. In a letter from a manager at the
Taxpayer Relief Centre for Expertise dated February 10, 2012, the second
request for relief was granted in part.
[20]
The
manager explained that interest relief had been granted for the taxation years
2008, 2009, 2010, 2011 and 2012. However, the penalties charged were not
cancelled.
[21]
The
manager noted consideration would not generally be given to cancelling a penalty
based on inability to pay or financial hardship unless an extraordinary
circumstance (such as flood or fire, civil disturbance, serious illness or
accident or serious emotional distress) prevented compliance. The manager
concluded that a review of the applicant’s case did show an inability to comply
with filing requirements based on factors beyond its control.
[22]
There
was also a taxpayer relief fact sheet for this decision, also prepared by someone
other than the manager. It noted an outstanding balance of $52,163.60. It
summarized the facts provided by the applicant and listed the documentation
provided. In considering the factors, it concluded that the taxpayer generally
complied with tax obligations, but had knowingly allowed a balance to exist.
The fact sheet indicated there had been some carelessness by the company, but
that many credits had been received and described the efforts by a company
representative to work with the CRA to clear the balance.
[23]
Under
the ability to pay heading, the sheet noted an arrangement to pay the balance
had been entered into. It also noted there was an inability to pay, as the
company’s total assets were $10,378 and its total liabilities were $14,333,887,
along with shareholders’ equity of $22,745,109. The fact sheet indicated that the
2010 asset and the 2009 loan referred to in the first decision were in fact
funds received from shareholders and lenders for operations and indicated the
$688,439 payment to the CRA. The fact sheet showed a liquidity ratio of
0.01285, when a ratio of 2.0 is generally considered sufficient for a company
to meet short term needs. The debt ratio was 1,120.47, where a ratio over 1.0
is considered not solvent. The company had shown a deficit every year since
2005. The fact sheet also summarized correspondence between the applicant and
the CRA.
[24]
The
fact sheet’s recommendation was to cancel arrears interest from 2008 to 2012
due to the financial hardship reflected in the company’s balance sheets.
However, it also recommended not cancelling penalties as the company was not
experiencing extreme financial difficulty as mentioned in IC07-1 Circular
(IC07-1). Penalties may also be cancelled under extraordinary circumstances
such as those described in the decision, but no such facts were present.
Issues
[25]
The
applicant’s memorandum raises the following issues:
1. Did the manager
incorrectly conclude that the financial crisis did not qualify as a disaster?
2. Did the manager
incorrectly conclude that the financial crisis did not qualify as an extraordinary
circumstance?
3. Did the manager
rely on personal rationalizations of the reasons for denying the penalty
refund?
4. Did the manager
incorrectly rely on failure to comply with filing requirements as grounds for
denial?
5. Did the manager
incorrectly transfer financial information from company submissions to CRA case
records?
6. Did the manager
fail to correctly parse the language of the regulations?
[26]
I
would rephrase the issues as follows:
1. What is the
appropriate standard of review?
2. Did the manager
err in refusing to relieve the applicant of penalties?
Relevant Policy
[27]
The
applicant relies on three paragraphs from the CRA’s Circular IC07-1:
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Circumstances
Where Relief From Penalty and Interest May Be Warranted
23.
The Minister may grant relief from the application of penalty and interest
where the following types of situations exist and justify a taxpayer's
inability to satisfy a tax obligation or requirement at issue:
a. extraordinary
circumstances
b. actions
of the CRA
c. inability
to pay or financial hardship.
. . .
Extraordinary
Circumstances
25.
Penalties and interest may be waived or cancelled in whole or in part where
they result from circumstances beyond a taxpayer's control. Extraordinary
circumstances that may have prevented a taxpayer from making a payment when
due, filing a return on time, or otherwise complying with an obligation under
the Act include, but are not limited to, the following examples:
a. natural
or man-made disasters such as, flood or fire;
b. civil
disturbances or disruptions in services, such as a postal strike;
c. a
serious illness or accident; or
d. serious
emotional or mental distress, such as death in the immediate family.
. . .
28.
Consideration would not generally be given to cancelling a penalty based on
an inability to pay or financial hardship unless an extraordinary
circumstance, as described in 25 has prevented compliance. However,
there may be exceptional situations that may give rise to cancelling
penalties, in whole or in part. For example, when a business is experiencing
extreme financial difficulty, and enforcement of such penalties would
jeopardize the continuity of its operations, the jobs of the employees, and
the welfare of the community as a whole, consideration may be given to
providing relief of the penalties.
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Situations
dans lesquelles un allègement des pénalités et des intérêts peut être
justifié
23.
Le ministre peut accorder un allègement de l'application des pénalités et des
intérêts lorsque les situations suivantes sont présentes et qu'elles
justifient l'incapacité du contribuable à s'acquitter de l'obligation ou de
l'exigence fiscale en cause :
a.
circonstances exceptionnelles;
b.
actions de l'ARC;
c.
incapacité de payer ou difficultés financières.
.
. .
Circonstances
exceptionnelles
25.
Les pénalités et les intérêts peuvent faire l'objet d'une renonciation ou
d'une annulation, en tout ou en partie, lorsqu'ils découlent de circonstances
indépendantes de la volonté du contribuable. Les circonstances
exceptionnelles qui peuvent avoir empêché un contribuable d'effectuer un
paiement lorsqu'il était dû, de produire une déclaration à temps ou de
s'acquitter de toute autre obligation que lui impose la Loi sont les
suivantes, sans être exhaustives :
a.
une catastrophe naturelle ou causée par l'homme, telle qu'une inondation ou
un incendie;
b.
des troubles publics ou l'interruption de services, tels qu'une grève des
postes;
c.
une maladie grave ou un accident grave;
d.
des troubles émotifs sévères ou une souffrance morale grave, tels qu'un
décès dans la famille immédiate.
.
. .
28.
De façon générale, on ne considèrera pas l'annulation d'une pénalité en
raison d'une incapacité de payer ou de difficultés financières à moins que
des circonstances exceptionnelles, telles qu'elles sont décrites au
paragraphe 25, aient empêché l'observation. Cependant, des situations
exceptionnelles peuvent donner lieu à l'annulation totale ou partielle des
pénalités. Par exemple, lorsqu'une entreprise a des difficultés financières
extrêmes et que l'application des pénalités mettrait en danger la continuité
de son exploitation, des emplois et du bien-être de la collectivité dans son
ensemble, on peut considérer un allègement des pénalités.
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Applicant’s Written Submissions
[28]
The
applicant argues the denial of the refund of penalties is not supported by the
CRA’s published policy. The applicant’s arguments are chiefly concerned with
the guidelines set out in IC07-1. The applicant argues that the manager failed
to consider that the global financial crisis constituted a “man-made disaster”
as contemplated in that circular. The applicant also argues that the financial
crisis constitutes “extraordinary circumstances” under the same paragraph.
[29]
In
response to the decision’s claim that penalties serve to encourage compliance
with filing, withholding and remitting requirements, the applicant argues
Parliament has seen fit to accommodate circumstances where encouragement is a
useless exercise, such as during disasters.
[30]
The
applicant argues that the manager misconstrued the criteria in the circular as
conjunctive instead of disjunctive; only one of the criteria need be met to
qualify for relief.
[31]
The
applicant notes that the use of “however” in paragraph 28 of the circular
indicates that what follows is an exception from the preceding text. The
applicant points out that the financial crisis was not less of a disaster than
a postal strike, as referred to in paragraph 25.
[32]
The
applicant notes it has created jobs which have created millions of dollars in
payroll and other taxes.
[33]
The
applicant also makes further legal argument in the affidavit of its agent.
While this is mostly repetitive of the arguments in the memorandum, the
applicant notes that the fact sheet directly states the poor financial
circumstances of the applicant, so it does not make sense for its application
to be rejected.
Respondent’s Written Submissions
[34]
The
respondent argues that reasonableness is the appropriate standard of review for
the Minister’s decisions under subsection 220(3.1) of the Income Tax Act.
[35]
The
respondent argues the decision was reasonable in process and in outcome. The
manager determined the applicant was not prevented in complying with any
extraordinary circumstances and further determined that the applicant was not
in an exceptional situation.
[36]
The
manager’s review of the applicant’s submissions confirmed that the applicant
had an inability to pay the full amount owed. This was reflected in the
decision that interest relief was warranted.
[37]
The
actions of the CRA and an applicant’s history of compliance are both relevant
factors in a taxpayer relief request.
[38]
Circular
IC07-1 is a guideline, not law. While it is helpful in the exercise of
discretion, it does not impede that discretion.
[39]
This
Court has previously held that a real estate slump is not similar to the
extraordinary circumstances discussed in the circular. This holding is equally
applicable to a financial crisis.
[40]
There
is no evidence the applicant was in an exceptional situation as contemplated in
paragraph 28 of IC07-1, as there was no evidence with respect to the
applicant’s employees and other stakeholders and how they would be affected by
the enforcement of penalties. There was similarly no evidence with respect to
how the community in which the applicant is located would be affected by the
enforcement of penalties.
[41]
Subsection
220(3.1) grants broad discretion to the Minister to allow relief or partial
relief and in this case, it was properly exercised.
Analysis and Decision
[42]
Issue
1
What is the appropriate
standard of review?
Where previous jurisprudence
has determined the standard of review applicable to a particular issue before
the court, the reviewing court may adopt that standard (see Dunsmuir v New Brunswick, 2008 SCC 9, [2008] 1 S.C.R. 190 at paragraph 57).
[43]
The
Court of Appeal has held that the exercise of discretion under subsection
220(3.1) of the Act is reviewed on a standard of reasonableness (see Telfer
v Canada (Revenue Agency), 2009 FCA 23 at paragraph 28, [2009] FCJ No 71).
[44]
In
reviewing the Minister’s decision on the standard of reasonableness, the Court
should not intervene unless the Minister came to a conclusion that is not
transparent, justifiable and intelligible and within the range of acceptable
outcomes based on the evidence before it (see Dunsmuir above, at
paragraph 4). As the Supreme Court held in Canada (Citizenship and
Immigration) v. Khosa, 2009 SCC 12, [2009] 1 S.C.R. 339, it is not up
to a reviewing court to substitute its own view of a preferable outcome, nor is
it the function of the reviewing court to reweigh the evidence (at paragraph
59).
[45]
Issue
2
Did the manager err in
refusing to relieve the applicant of penalties?
The respondent is correct
that guidelines are not legally binding on decision makers; however, in this
case, I do not see any conflict between the guidelines and the decision so the
analysis need not proceed any further than that.
[46]
Paragraph
25 of IC07-1 clearly provides an elaboration on the term “extraordinary
circumstances”, as the term is used in paragraph 23. The applicant’s position
is that its circumstances fall within the meaning of that paragraph.
[47]
First,
I would note that the applicant’s argument that the financial crisis qualified
as a “disaster” within the meaning of paragraph 25 was not made to the CRA. The
applicant’s submissions mentioned the financial crisis as part of the
explanation provided for inability to pay, but there was no sign the applicant
was relying specifically on the analogy to a natural disaster and it certainly
is not a self-evident argument. It would therefore be inappropriate for this
Court to quash the decision on that basis, as the purpose of judicial review is
to determine whether a reasonable decision was made based on the record before
the original decision maker, irrespective of arguments raised after the fact.
[48]
Ultimately,
however, even if the CRA had turned its mind to the issue of the examples in
paragraph 25 of IC07-1, it would have been reasonable to conclude that a
financial crisis is not analogous to those examples. Mr. Justice Simon Noël
previously concluded that a real estate slump was not similar to those same
examples in Cooke v Canada (Attorney General), 2009 FC 1161 at paragraph
18, [2009] FCJ No 1586:
The
applicant submits that the real estate slump in the 1990s is similar to
extraordinary circumstances as discussed in the Guidelines, since it was an
event beyond his control. The Court notes that we are not dealing here with an
event comparable to the examples set out in paragraphs 5(a) and (b) of the
Guidelines, such as flood, fire, civil disturbances or disruptions in services.
The real estate slump was caused by a series of decisions made by
businesspeople. It did not arise out of extraordinary circumstances such as the
examples in the Guidelines. Of course, the circumstances were not intended by
the businesspeople, but their decisions made the circumstances possible. The
same thing could apply to the crash in the high-technology sector in the late
1990s and early 2000s.
[49]
The
final sentence makes clear that this analysis is not confined to a particular
real estate slump, but to the peaks and valleys of the capitalist system
generally and its inherent creative destruction. In a market economy, financial
fluctuations are not extraordinary. The examples listed in paragraph 25 of
IC07-1 are distinct from that concept. While I appreciate the applicant’s point
that a postal strike is closer to a financial disruption than a natural
disaster, read in its whole, the meaning of paragraph 25 is clear that reduced
demand from a particular sector is not “extraordinary” within its meaning.
[50]
Of
course, in IC07-1, paragraph 24 also makes clear that a request that does not
fall into the criteria of paragraph 23 may still be granted, which is
appropriate given the non-binding nature of the guideline. However, the
applicant has not provided any reason why it should fall into this category and
given the widespread effects of the financial crisis, it is not clear what sets
this business apart from the economy generally.
[51]
Turning
to paragraph 28 of IC07-1, I agree with the applicant that it creates an
exception to the extraordinary circumstances described in paragraph 25, as
indicated by the use of “however”. I also agree with the applicant that the
record shows that the CRA clearly acknowledged the financial difficulties
suffered, as evidenced by the comment from the fact sheet that “[t]he company
is in a grim financial situation”.
[52]
Extreme
financial difficulty, however, is not the only criterion mentioned in paragraph
28. Rather, the text makes clear that it is extreme financial difficulty in
combination with the terms that follow:
.
. . However, there may be exceptional situations that may give rise to
cancelling penalties, in whole or in part. For example, when a business is
experiencing extreme financial difficulty, and enforcement of such
penalties would jeopardize the continuity of its operations, the jobs of the
employees, and the welfare of the community as a whole, consideration may be
given to providing relief of the penalties. [emphasis added]
[53]
To
properly apply paragraph 28, the decision maker must consider whether there is
extreme financial difficulty in combination with the three following factors of
continuity of operations, jobs of employees and welfare of the community.
[54]
In
this case, the applicant does not appear to have made any submissions on those
three factors. While the letter of November 14, 2011 mentions jobs, no further
detail is provided and most importantly, no link is drawn between the
enforcement of penalties and the existence of jobs. Similarly, there is no
mention of the continuity of operations (beyond the general claim of financial
difficulty) or the welfare of the community.
[55]
I
appreciate the dire circumstances of the applicant, as confirmed by the CRA’s
own report. However, I see nothing in this decision which conflicts with
intelligibility, justification or transparency or puts it outside the range of acceptable
outcomes.
[56]
Therefore,
the application is dismissed.
[57]
Both
parties have asked for costs. Because of the nature of this application, the
factual background of this case, including the financial position of the
applicant and the applicant’s efforts to pay the debt, I am not prepared to
make an order of costs.
JUDGMENT
THIS
COURT’S JUDGMENT is that:
1. The application for
judicial review is dismissed.
2. There shall be no order
as to costs.
“John A. O’Keefe”
ANNEX
Relevant
Statutory Provisions
Income
Tax Act,
RSC 1985, c 1 (5th Supp)
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220.
(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.
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220.
(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.
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