Alex Parallel Computers Research Inc. v. R., [1999] 2 CTC 180, [1999] DTC 5283

Pinard J.:

This application for judicial review, made pursuant to section 18.1 of the Federal Court Act, R.S.C., 1985, c. F-7, as amended, concerns a decision dated June 16, 1997, by Harvey C. Beaulac in his capacity as Director of the Ottawa Taxation Office, Revenue Canada, Customs, Excise and Taxation (the Director). This decision refused to grant the applicant a waiver of the requirement to file a prescribed form and an extension of the time for making a return or filing a prescribed form for the 1994 taxation year under subsections 220(2.1) and 220(3) respectively of the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.), as amended. These statutory provisions read as follows:

Facts

The applicant, Alex Parallel Computers Research Inc. (APCR) is a computer company which specializes in the design and development of software programs used on super-computers called “parallel computers”, which es- sentially run on the raw computer power they draw from several microcomputers.

On March 1, 1993, APCR entered into a research agreement with the University of Ottawa, under which the University agreed to carry out experimental research and development work into certain software programs as part of a research project called [TRANSLATION] “Urban Simulation and Automatons: Proposal for a New Model of Urban Dynamics” (the “research agreement”). Article 5.2 of this research agreement provided that in consideration for the research activity conducted by the University of Ottawa, APCR would pay $2,944,482.93 to the University, in 24 equal monthly payments of $122,686.79, from March 1993 to March 1995.

On or about August 31, 1994, Revenue Canada began to audit APCR’s tax return for its 1993 taxation year with regard, inter alia, to the investment tax credits claimed by APCR for scientific research and technical development expenditures incurred in connection with the research agreement. During the entire period of the audit, almost two years, APCR cooperated fully with Revenue Canada by supplying all of the scientific, technical and financial information required by Revenue Canada. Among other things, Revenue Canada had access to all of APCR’s banking records, or at least those concerning the 1993 and 1994 taxation years. This audit also included a group of companies, namely Alex Informatique Inc., I.M.D. Research Corporation, M.P.P. Research Corporation Inc. and Almerco Inc. (the other companies). These tax audits led to discussions and negotiations which subsequently resulted in an agreement (the agreement) between Revenue Canada and the applicant which was signed on March 12, 1996. These negotiations and discussions also resulted in a similar agreement between Revenue Canada and the other companies, which were represented by the same counsel as the applicant.

For the 1993 taxation year, the agreement specifically set out the expenses which Revenue Canada was prepared to accept and to assess, as a tax audit of the applicant had been done for that year. For the 1994 and 1995 taxation years, the agreement stipulated that, pursuant to sections 37, 127 and 127.1 of the Income Tax Act, the applicant agreed to claim 66.5% of the amounts paid in each of the years, in accordance with the research agreement.

For its 1994 taxation year, the applicant could claim the expenditures of a current nature it had made in the year for scientific research and experimental development and claim tax credits for these activities, in accordance with the Income Tax Act, by filing the prescribed form containing the prescribed information. As its 1994 taxation year ended on October 30, 1994, the applicant had until April 30, 1996 to file the prescribed forms which would allow it to qualify for the investment tax credits and to deduct expenditures of a current nature made in the year for scientific research and experimental development activities in computing its income. However, the prescribed forms for the 1994 taxation year were not filed until June 12, 1996 three months after the conclusion of the agreement with Revenue Canada and six weeks after the due date prescribed by the Income Tax Act. In fact, Ms. Jill Abraham contacted counsel for the applicant by telephone on June 7, 1996, to inform counsel that Revenue Canada had not received the applicant’s 1994 tax return and that it therefore could not begin the audit of that year. Five days later, namely on June 12, 1996, the applicant filed its 1994 tax return, which was delivered directly to Ms. Jill Abraham’s office at Revenue Canada. Furthermore, the other companies had all filed their 1994 tax returns with the prescribed forms within the time set out in the Income Tax Act, even before the conclusion of the March 1996 agreement.

As the preliminary steps it had taken to avoid the adverse consequences of its failure to act within the prescribed time were not successful, APCR finally made a request on February 3, 1997, to the Director responsible for exercising the discretionary powers provided in subsections 220(2.1) and 220(3) of the Income Tax Act, supra, to waive the requirement to file the prescribed forms or, in the alternative, a request to extend the time. It is the decision refusing these two requests which is the subject of the instant application for judicial review.

Issue

APCR essentially criticizes the Director for having illegally exercised his discretion by:

a) failing to observe APCR’s right to be fairly treated by denying it a meaningful right to be heard;

b) erring in law by giving an unduly restrictive interpretation to the discretion conferred on him by subsections 220(2.1) and 220(3) of the Income Tax Act; and

C) taking factors not relevant to the exercise of his discretion into consideration and refusing to consider factors relevant to the exercise of his discretion.

Analysis

In support of the two parts of its request, APCR essentially indicated to the Director that the agreement specifically provided, inter alia, that APCR could deduct 65% of the amounts of research and development expenditures for the 1994 taxation year; that, according to the result of the audit, the correspondence between the parties during the audit and the settlement they reached, Revenue Canada had had full knowledge of the amounts for research and development expenditures to which APCR was entitled for the 1994 taxation year; that Revenue Canada had accepted the amounts of the tax deductible expenditures for research and development expenditures made by APCR for its 1994 taxation year; and that it was only after the agreement of March 12, 1996 that APCR could finalize the allowable tax deductible amount of research and development expenditures for its 1994 taxation year, as this amount depended on the result of the audit and negotiations under way with Revenue Canada.

The Director denied the first part of APCR’s request, a waiver of the requirement to file the prescribed forms under subsection 220(2.1) of the Income Tax Act, for the sole reason that the provisions of subsection 220(2.1) should be limited to electronic document filing, in accordance with a departmental application policy. The following is what the Director’s decision actually says on this subject:

It is the stated position of Revenue Canada that Subsection 220(2.1) may not be used to avoid the strict time limits imposed Subsections 37(1) and 127(9). The intention of this provision was to accommodate E-File and allow documents not to be submitted when they would normally be required for “paper” filing. We have referred this specific issue to our Headquarters and have received their advice that their instructions on this matter previously given to the field should be followed.

It is not disputed that the application policy to which the last sentence of this excerpt of the decision refers is the one expressed as follows by Martin T. Harvey, an employee of Revenue Canada in charge of APCR’s file, during examination for discovery prior to the instant application for judicial review: [1] 1

Application policy SR and ED 9601, page seven (7), states that, quote:

“Any requests to waive this requirement,” and I put in brackets in this because it’s just an explanation, “(to provide prescribed information within given time frames),” closed brackets, “under subsec- tion 222.1 should be denied. Subsection 222.1 was included in the Act to accommodate E-filing”

End of quote.

In my view, by strictly applying this application policy as he did (and as Revenue Canada Headquarters advised him to do), the Director elevated guidelines to the level of law, and accordingly limited his decision-making authority in the exercise of the discretion conferred on him by an enabling statute. This is exactly the opposite of what is laid down in Maple Lodge Farms v. Canada, [1982] 2 S.C.R. 2, where the Supreme Court of Canada stated at pages 6 and 7:

... The discretion is given by the Statute and the formulation and adoption of general policy guidelines cannot confine it. There is nothing improper or unlawful for the Minister charged with responsibility for the administration of the general scheme provided for in the Act and Regulations to formulate and to state general requirements for the granting of import permits. It will be helpful to applicants for permits to know in general terms what the policy and practice of the Minister will be. To give the guidelines the effect contended for by the appellant would be to elevate ministerial directions to the level of law and fetter the Minister in the exercise of his discretion. Le Dain J. dealt with this question at some length and said, at p. 513:

The Minister may validly and properly indicate the kind of considerations by which he will be guided as a general rule in the exercise of his discretion (see British Oxygen Co. Ltd. v. Minister of Technology, [1971] A.C. (H.L.) 610; Capital Cities Communications Inc. v. Canadian Radio-Television Commission, [1978] 2 S.C.R. 141, at pp. 169-171), but he cannot fetter his discretion by treating the guidelines as binding upon him and excluding other valid or relevant reasons for the exercise of his discretion (see Re Hopedale Developments Ltd. and Town of Oakville [1965] 1 OR. 259).

In the case at bar, the wording of subsection 220(2.1) of the Income Tax Act does not in any way limit the exercise of the Minister’s discretion to waive the requirement to file a prescribed form or other document solely to cases in which the taxpayer electronically files prescribed forms or other documents.

Accordingly, by interpreting and limiting the discretion conferred on him by subsection 220(2.1) of the Income Tax Act as he did, the Director erred in law and unduly failed to exercise the statutory discretion which allows him to take into account the circumstances explained to him above by APCR. Of course, it is not for me to exercise the discretion conferred by subsection 220(2.1) myself, any more than it is my responsibility to tell the Director how to evaluate all of APCR’s specific circumstances. I can only refer the matter back to the Minister (or to his duly authorized representative) with instructions to not strictly limit the exercise of the discretion conferred by subsection 220(2.1) to guidelines which do not have the force of law.

As for the second part of the Director’s decision, although I have serious doubts about its validity in light of my colleague Mr. Justice Joyal’s decision in Kutlu, [2] a similar case, I do not believe it is necessary to make a determination now, as it is still possible that, after reconsidering the matter, the Minister (or his duly authorized representative) will grant either the required waiver under subsection 220(2.1), which would make APCR’s request under subsection 220(3) unnecessary, or even the extension of time sought under this provision.

For all of these reasons, the application for judicial review is allowed, the Director’s decision dated June 16, 1997, is set aside, and the matter is referred back to the Minister (or to his duly authorized representative) to be reconsidered on the basis that the discretionary power conferred by subsection 220(2.1) of the Income Tax Act cannot be fettered by treating an application policy or guidelines as binding upon him and excluding other valid or relevant reasons for the exercise of his discretion.

Application allowed.