Docket: T-557-17
Citation:
2018 FC 59
Toronto, Ontario, January 23, 2018
PRESENT: The
Honourable Mr. Justice Campbell
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BETWEEN:
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REFERRED REALTY
INC.
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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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JUDGMENT AND REASONS
[1]
On January 12, 2012, the Respondent Minister of
National Revenue of Canada (Minister) garnished $615,000 from the Applicant’s
bank account because of the Applicant’s failure to file required tax returns
and an ensuing arbitrary assessment of a tax liability of $155,000. In
response, pursuant to s. 221.2 of the Income Tax Act (ITA), the
Applicant made a request to the Minister to exercise discretion to grant re-appropriation
of statute-barred credits against future tax liability in the amount of
$185,817.71, being the monies remaining from the garnishment after the payment
of all outstanding taxes and $50,000 of penalties for late filing (see: Amended
Notice of Application, paras. 10, 12, 13, and 14).
[2]
By a decision dated January 10, 2017 (Decision)
presently under review, a Delegate of the Minister (Delegate) rejected the
Applicant’s request. The central issue raised in the present Application is whether
the Decision is reasonable. For the reasons that follow, I find that the Decision
is unreasonable because it lacks justification (see: Dunsmuir v New
Brunswick, 2008 SCC 9 at para. 47).
I.
The Applicant’s Failure to File
[3]
In addition to the information provided in the
Delegate’s Decision as quoted below, the nature of the accounting problems
experienced by the Applicant resulting in failure to file were reported to the
Respondent Minister by the Applicant’s accountants in a letter dated July 21,
2014:
Extraordinary circumstances
The taxpayer maintains a realty brokerage
business in North Toronto. The business commenced operations in the beginning
of 2004. The taxpayer hired an experienced administrator to run the accounting
and administration function of the office. This individual maintained the
records adequately through the fiscal years ended July 2004 and July 2005. Some
small administrative suggestions were provided by the accountants but overall
the accounts were complete and accurate.
A number of concerns were raised by the
accountants in regards to the accounting records of the company while
completing the 2006 year-end. The accountants spent a considerable amount of
time in reviewing and analyzing the records and ultimately booked a number of
adjustments to ensure the accounts were accurate. A number of concerns were
raised at that time and they were taken up with the office administrator and
the shareholder president. The office administrator was terminated shortly
thereafter.
After the administrator was terminated, it
was determined that he had not been keeping up with his work requirements. The
accounting records for the period subsequent to the July 31, 2006 year-end were
incomplete and in many cases, documents were either misplaced or missing
altogether. At that time, the taxpayer commenced a project to bring these
records up to date. Unfortunately, the scope of the task was larger than
expected and when the time came to file the T2 for the year-ended July 31,
2007, the accountants expressed concerns that there were too many unanswered
questions to file an accurate tax return. Consequently, the taxpayer remitted
an amount equal to the estimated income tax prior to the T2 tax filing
deadline.
The taxpayer continued to attempt to bring
the records up to date with the assistance of a new office administrator.
However, this individual also turned out to be incapable to the task and misled
both the president and the accountant as to the status of both the historical
information and information relevant for years subsequent to July 31, 2007.
This person was also terminated in the middle of 2009.
The taxpayer engaged an outside bookkeeper
to go through the records from August 1, 2006 forward in an attempt to
reconstruct all transactions and bring the filings up to date. Due to the
volume of the task and a number of other factors, including some employee
illnesses, this process took an extended period. In the meantime, the taxpayer
estimated its taxes for each taxation year and remitted payment based on the
estimates to meet its expected tax obligation. In early 2012, the accounts
were finally brought into a state where filing could be completed for the
year-ended July 31, 2007 and then subsequent periods through July 31, 2011.
These filings were completed by July 2012.
Despite the difficulties the taxpayer was
experiencing in bringing its accounting records into order, the taxpayer
respected the fact that it had an obligation to pay tax and taxes were remitted
for each period based on an estimate of the taxes payable based on their best
attempt to determine the taxable income for each year. Reasonable efforts were
made to rectify the bookkeeping problems and bring the accounts to a state
where accurate returns could be filed.
[Emphasis added]
(Certified Tribunal Record (CTR), pp. 48-49)
II.
The Minister’s Policy
[4]
In assessing the request pursuant to s. 221.2(1)
of the ITA, the Minister may have regard to the User Guide,
Re-appropriation of T2 statute-barred Credits (Business Accounting Programs,
December 2016), which states:
Guidelines
The following requirements must be met in
order to request a re-appropriation of a statute-barred credit:
[…]
4. The corporate taxpayer must be compliant
with all of its filing obligations before the CRA will consider re-appropriating
a statute-barred credit.
[…]
Extraordinary circumstances
This section provides examples of various
extraordinary circumstances and guidelines for evaluating them.
The types of circumstances beyond a
taxpayer's control that may have prevented a taxpayer from filing their T2
return within three years from their tax year end may be summarized by, but not
limited to, the following examples:
• natural or
human-made disasters such as flood, heavy storms, or fire;
• civil
disturbances or disruptions in services such as strikes or demonstrations;
• serious
illness or accident; and
• serious
emotional or mental stress caused by death, or loss or employment, accident in
the immediate family, marital separation, or loss of employment.
[…]
CRA error or delay
The application of ministerial discretion
may be warranted when the T2 statute-barred credit is a result of CRA action
and through no fault of the taxpayer.
[…]
Other circumstances
The CRA may also apply ministerial
discretion if a taxpayer's circumstances do not fall within the situations
described above. Each case must be reviewed based on its own circumstances.
[Emphasis added]
(CTR, pp. 128, 168, 171-172)
III.
The Decision
[5]
The January 10, 2017 Decision under review
provides basic uncontested facts and the outcome being challenged:
Re: Re-appropriation of T2 Statute-barred Credits
Dear Sir or Madam,
We apologize for the delay in responding to
your request for a second- review of our decision to deny re-appropriation of
the statute-barred credit of $191,734.89 from the July 31, 2007, tax year-end.
Based on the information you provided in
your correspondence dated March 11, 2016, we have upheld the original decision
not to re-appropriate the statute-barred credits for the tax year-end noted
above. Below, we have outlined the information we considered during our second
review and the reasons for our decision.
You stated that the taxpayer did not
wilfully ignore its obligations to file its returns of income in a timely
manner. You also stated that in each of its 2007 to 2010 taxation years, the
corporation paid all of the estimated taxes owing for that taxation year and
that the corporation had no intention to avoid its obligation to pay its tax
liability as determined under the Income Tax Act. Furthermore, you stated that
the taxpayer was unaware of the necessity of filing a return of income within three
years in order to be able to receive a refund under subsection 164(1) of the Income
Tax Act and that the corporation relied on the advice of its professional
tax advisor that it should not file its returns of income until its books and
records were in satisfactory condition. You also stated that you do not
believe that the Minister's ability to re-appropriate is dependent upon whether
a taxpayer has justifiable explanation for why its return of income was not
filed.
Our records indicate that the Canada Revenue
Agency issued several requests to the corporation to file missing returns. On
October 21, 2008, the Canada Revenue Agency issued a Request to File letter for
the 2007 tax year-end. On December 2, 2008, the
Canada Revenue Agency issued a Second
Request to File letter for the 2007 corporate tax year-end. The Canada Revenue
Agency issued a letter dated March 2, 2011, stating that the corporate returns
for the 2007, 2008, 2009 and 2010 corporate tax year-ends were outstanding and
that if the returns were not filed by April 29, 2011, the Canada Revenue Agency
may issue arbitrary assessments to those tax years. Although the corporation
was made aware of its tax obligations, it did not comply with these requests. This
indicates that the corporation knowingly had not taken measures to correct the
non-compliance within a reasonable timeframe.
In your letter dated March 11, 2016, you
noted that taxes were actually remitted when due. Corporation taxes are due
either 2 or 3 months following their tax year-end depending on their type or
information they report. Based on our records, the taxes were not remitted by
the statutory due date for this corporation in any of the tax years outlined in
your letter (i.e. 2007 to 2010). For example, for the tax year-end in question
(July 31, 2007), the balance due date was October 31, 2007; however, the payment
for this period was not remitted until January 31, 2008. We do not agree that this
demonstrates due diligence of the taxpayer in upholding his obligations.
The subsection 150(1)(a) of the Income Tax
Act requires that a corporation files income tax returns. Similarly, the
subsection 230(1) of the Income Tax Act requires every person carrying on
business and every person who is required to pay or collect taxes or other
amounts to keep records and books of account in such form and containing such information
as will enable the taxes payable to be determined.
The Canada Revenue Agency is committed to
making information available to assist taxpayers understand their tax
obligations. Corporation's filing and payment requirements as well as the
limitation on receiving refunds if returns are not filed on time are explained
in the T2 Corporation Income Tax Guide, within our website www.cra-arc.gc.ca.
Similarly, the requirement to maintain adequate books and records is explained
in the Information Circulars ICO5-1, Electronic Record Keeping, and IC78-10,
Books and Records Retention/Destruction. The circulars explain that the taxpayer
is not relieved of the responsibility of maintaining adequate books and records
when they use services of a third party. This information can also be obtained
through our toll-free enquiry line (800) 959-5525.
The subsection 221.2 of the Income Tax Act
is discretionary. Discretion is typically exercised to relieve negative
consequences due to circumstances which prevented the taxpayer from meeting his
tax obligations. However, these circumstances must be demonstrated to have been
outside of the taxpayer's control and the taxpayer should be able to
demonstrate how he corrected any delay or omission within a reasonable time
after he or she became aware of it.
From the information you provided, it appears
the reason that prevented the taxpayer from meeting his obligations was due to
an inability to keep adequate books and records for his corporation.
Keeping adequate books and records and
filing tax returns are requirements under the Income Tax Act. The taxpayer reported that he was aware of the problem in 2006,
and there is evidence of multiple written correspondences from the CRA advising
the corporation of its late or missing returns. The taxpayer did not
demonstrate that sufficient action was taken to remedy this situation within a
reasonable timeframe as returns continued to remain outstanding until 2012.
Finally, during our review, we have also
reviewed the corporation's current general filing compliance. Our records
indicate that this corporation was required to file their GST returns on a
monthly filing frequency since January 1, 2006; however, we have noted
several occasions when returns were not filed on time and Failure to File Penalties
were applied. Our current records also indicate that there is an overdue
return on the corporation's […] program account. The corporation must be filed
up to date for all program accounts before considering re-appropriation of the T2
statute-barred credits.
Based on the information you provided and our
review, we will not exercise Ministerial discretion to re-appropriate the
statute-barred credits for the July 31, 2007 tax year-end because the
corporation had knowledge that it was not complying with their corporation
filing requirements, it was also aware of the source of the issue however
did not take sufficient action to resolve it within a reasonable timeframe in
order to comply with its filing obligations to the Income Tax Act.
If you believe this decision is not fair,
you can apply to the Federal Court for a judicial review. […]
[Emphasis added]
(CTR), pp. 79-80)
IV.
Justification
[6]
In my view, the Delegate was required to state a
clear and supportable justification to deny the Applicant’s re-appropriation
request given the large sum of money under consideration.
[7]
As outlined above, by the letter of July 21,
2014, the Delegate was advised of the serious problems encountered by the
Applicant in re-structuring the corporation’s financial affairs due to issues not
of the Applicant’s own making. There is no evidence that the Applicant was
intentionally neglecting or avoiding its responsibility to maintain proper
records. To the contrary, the evidence establishes that the Applicant’s active efforts
were directed to meeting its responsibility, and in the end result, upon
professional advice, once the financial affairs were placed in order, all taxes
and penalties were paid without objection or request for relief.
[8]
With respect to consideration of whether the
Applicant conformed to the “Extraordinary” and “Other” features of the Minister’s Policy, the emphasized
passages in the Decision makes it clear that the Delegate’s decision-making was
centred on compliance with the statutory requirement that tax payers, including
the Applicant, must keep adequate books and records. Without critical analysis
of the Applicant’s evidence of best efforts to meet the statutory requirement, the
Delegate found that his or her subjective expectations were not met. As emphasised
in the Decision, the Delegate made the statement that “the
taxpayer did not demonstrate that sufficient action was taken to remedy this
situation within a reasonable timeframe as returns continued to remain
outstanding until 2012” without clarification of what “sufficient action” was expected, and what “reasonable timeframe” was expected.
[9]
In my opinion, the statement is the only clear
reason supplied in the Decision for refusing the Applicant’s re-appropriation
request. Read in context, I find that the statement constitutes the delivery of
a punishment to the Applicant for perceived failure to meet the Delegate’s
unclear expectations. During the course of the hearing of the present
Application, when this tentative finding was placed before Counsel for the
Respondent for comment, no argument was presented in response that the finding
is supportable in fact or law. In the result, I find that the Delegate’s delivery
renders the Decision unreasonable.
[10]
As an adjunct feature of the delivery, the
Delegate relied on the Applicant’s GST record. Throughout the transaction
between the Applicant and the Minister respecting the re-appropriation request,
the GST record was not introduced as an issue. I find that, not only was it unfair
for the Delegate to include it in the decision-making process without providing
advance notice and an opportunity for the Applicant to respond, it is an
extraneous consideration the introduction of which, in and of itself, renders
the Decision under review as unreasonable.
V.
Conclusion
[11]
For the reasons provided, there is no
justification in the Decision for rejecting the Applicant’s request for
re-appropriation of the statute-barred credit.
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