Docket: T-956-13
Citation:
2016 FC 955
Ottawa, Ontario, August 23, 2016
PRESENT: The
Honourable Mr. Justice Boswell
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BETWEEN:
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DAVID ANTHONY
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Applicant
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and
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CANADA REVENUE
AGENCY
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Respondent
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JUDGMENT AND REASONS
[1]
The Applicant has brought an application
pursuant to section 18.1 of the Federal Courts Act, RCS 1985, c F-7, as
am, for judicial review of a decision by a delegate of the Minister of National
Revenue dated May 2, 2013. The decision under review denied the Applicant a
personal deduction for rental expenses incurred in leasing two machines which
he used to earn income in 2001 on the basis that the machines were leased in
the name of his corporation, D.A. Machining Consulting Inc., and such expenses
were deductible against income earned by the corporation.
I.
Background
[2]
The Applicant, David Anthony, is a self-employed
machinist. In 2000, the Applicant’s partner, AKM Machinery Sales Inc. [AKM],
purchased a milling machine and a lathe machine. In 2001, the Applicant’s
suspicion that his partner was cheating him of income led him to start billing
his customers directly under his business name, D.A. Machining Consulting,
while paying his partner for use of the machines. After the Applicant moved to
another location in August 2001, he arranged to acquire the machines from AKM
through CIT Financial Ltd. [CIT] who bought the machines and then leased them
back to the Applicant’s corporation, D.A. Machining Consulting Inc. The
Applicant says he intended to transfer and rollover the business of D.A. Machining
Consulting into his corporation in 2002; however, his accountant at the time
did not complete the intended rollover.
[3]
In April 2005, the Applicant’s 2001 and 2002 tax
returns were audited by the Canada Revenue Agency; the CRA found unreported
revenue and disallowed some expense claims, including the capital cost
allowance the Applicant had claimed for the two machines. Following a meeting
the Applicant and his accountant had with a CRA auditor relating to the
reassessments, the CRA offered in a letter dated February 1, 2007, to settle
the issues arising from the Applicant’s 2001 and 2002 taxation years if the
Applicant signed a waiver of his appeal rights for both 2001 and 2002 in
respect of his business income and expenses. The Applicant says he understood
from his accountant that, despite having signed the waiver, he would still be
able to appeal the issues concerning the two machines to the Tax Court of
Canada. However, the Tax Court denied his appeal in a judgment dated October
17, 2007, finding that the Applicant was bound by the waiver he had signed and
that subsection 169(2.2) of the Income Tax Act, RSC 1985, c 1 (5th Supp)
[the ITA] barred any right to appeal the reassessment of his 2001
taxation year in relation to business expenses (see: Anthony v The Queen,
2007 TCC 606, [2008] 2 CTC 2398).
[4]
In November 2010, the Applicant filed a T1
Adjustment Request for his 2001 taxation year, requesting that the Minister
reassess his tax liability for that year to allow a deduction for rental
expenses associated with the two machines. This request was denied though, in a
letter dated September 21, 2011, on the basis that the purpose of subsection
152(4.2) was not to dispute or disagree with the correctness of an assessment
that had been previously dealt with under an objection. Accordingly, on January
19, 2012, the Applicant’s accountant wrote to the CRA, requesting a second
administrative review in respect of the rental payments for the two machines in
the 2001 taxation year. This second request was also denied, however, in a
letter dated May 2, 2013, in which the Minister’s delegate stated:
With respect to the machine rental payments
paid to CIT Financial Ltd. on behalf of your corporation, we are unable to
grant your request to deduct $22,370. The lease agreement is between CIT
Financial Ltd. as the lessor and D. A. Machining Consulting Inc. as the lessee.
According to the facts of the case, these machines were used by D. A. Machining
Consulting Inc. to earn income. The rental expenses incurred are deductible
against the income earned by D. A. Machining Consulting Inc. In this case,
expenses were paid by you as a shareholder of D. A. Machining Consulting Inc.
Therefore, the rental expenses are not deductible on your personal T1 income
tax return and your request for an additional deduction from your personal
income for the 2001 taxation year is denied.
[5]
The Applicant now asks that the Court quash the
decision made by the Minister’s delegate and send the matter back to be dealt
with by a different delegate.
II.
Issues
[6]
This application raises the following issues:
1.
Is the matter properly before the Federal Court?
2.
If so, should the documentation submitted by the
Applicant which was not before the Minister’s delegate be accepted or
considered by the Court?
3.
What is the appropriate standard of review?
4.
Was the decision under review unfairly rendered
or substantively unreasonable such that it should be quashed?
III.
Analysis
A.
Is this matter properly before the Federal
Court?
[7]
Although neither party has questioned whether
this Court has jurisdiction to hear and determine this matter, it is
nevertheless appropriate to consider this issue because the Court should not
assume jurisdiction over a matter which is beyond its jurisdiction. In
addressing this issue, I begin by noting that subsection 12(1) of the Tax
Court of Canada Act, R.S.C. 1985 c. T-2 [TCCA], empowers the Tax
Court of Canada with “exclusive original jurisdiction
to hear and determine references and appeals … on matters arising under
[various Acts, including] … the Income Tax Act … when references or
appeals to the Court are provided for in those Acts.” That court also
has exclusive original jurisdiction to hear and determine questions referred to
it under sections 173 or 174 of the ITA (TCCA ss. 12(3)).
[8]
Furthermore, section 18.5 of the Federal
Courts Act divests the Federal Court of its administrative law jurisdiction
for any matter that can be resolved by an appeal to the Tax Court (see: Canada
(National Revenue) v Sifto Canada Corp., 2014 FCA 140 at para 21, [2014] 5
CTC 26 [Sifto]). Consequently, although the Federal Court has broad
powers with respect to judicial review, it cannot deal with matters which are
appealable to the Tax Court (see: Canada (National Revenue) v JP Morgan
Asset Management (Canada) Inc., 2013 FCA 250 at para 27, [2014] 2 FCR 557 [JP
Morgan]).
[9]
When faced with an application for judicial
review concerning matters arising in relation to the ITA, this Court
must read and assess the application “holistically with
a view to understanding its essential character, rather than fastening on
matters of form” (Sifto at para 25). It must also be alert to “skilful pleaders” who can “make
Tax Court matters sound like administrative law matters when they are nothing
of the sort” (JP Morgan at para 49). Also, it is clear that the
Federal Court’s jurisdiction includes judicial review of the exercise of
ministerial discretion by the Minister provided the matter is not otherwise
appealable (see: Canada v Addison & Leyen Ltd., 2007 SCC 33 at para
8, [2007] 2 S.C.R. 793).
[10]
To properly be in Federal Court when the ITA
is engaged, an applicant must: (1) show that judicial review is available under
sections 18 and 18.1 of the Federal Courts Act; and (2) “state a ground of review that is known to administrative law
or that could be recognized in administrative law” (JP Morgan at
paras 68-70). In JP Morgan, the Federal Court of Appeal identified (at
para 70) three grounds of judicial review known to administrative law, namely:
(a) lack of vires; (b) procedural unacceptability; and (c)
substantive unacceptability (i.e., a decision that is not reasonable).
[11]
Sections 18 and 18.1 of the Federal Courts
Act focus on the Federal Court’s jurisdiction and the timelines and
available remedies with respect to an application for judicial review. In this
case, the Applicant has met the appropriate timelines for his judicial review
application and is requesting a remedy within this Court’s jurisdiction;
namely, that the decision dated May 2, 2013 be quashed and the matter sent back
for redetermination by a different delegate of the Minister. Consequently, the
Applicant’s application for judicial review satisfies the first requirement
emanating from JP Morgan (at paras 68-69; also see: Air Canada v
Toronto Port Authority et al, 2011 FCA 347 at paras 24-29, [2013] 3 FCR
605).
[12]
The second prong of the JP Morgan test
asks whether the application states a ground of review known to administrative
law or one which could be recognized in administrative law. In this case, the
Applicant raises issues of procedural or substantive unacceptability, asserting
that the Minister’s delegate ignored relevant evidence or misapprehended the
facts and arbitrarily failed to exercise his discretion under the taxpayer
relief provisions. These issues, in turn, prompt the question of whether they
raise cognizable administrative law claims over which this Court has
jurisdiction.
[13]
In my view, the issues raised by the Applicant
in this application involve cognizable administrative law claims and,
accordingly, I conclude that the Court has jurisdiction to hear and decide the
Applicant’s application for judicial review. This conclusion is reinforced by
numerous cases where this Court has assumed and exercised jurisdiction to
judicially review an exercise of the Minister’s discretion under subsection
152(4.2) of the ITA (see: e.g., Ford v Canada (Attorney General),
2015 FC 1057, appeal dismissed 2016 FCA 128 (CanLII); Sullivan v Canada,
2014 FC 486 (CanLII), 455 FTR 159; Lambert v Canada (Attorney General),
2015 FC 1236 (CanLII); Canada (Attorney General) v Abraham, 2012 FCA
266, 440 NR 201 [Abraham]; White v Canada (Attorney General),
2011 FC 556, 390 FTR 36; Caine v Canada Revenue Agency, 2011 FC 11
(CanLII), 382 FTR 111; Hoffman v Canada (Attorney General), 2010 FCA 310
(CanLII) [Hoffman]; Leblanc v Canada (Attorney General), 2010 FC
688, 371 FTR 191 [LeBlanc]; Lemerise v Canada (Attorney General),
2010 FC 116 (CanLII); Nicholls v Canada (National Revenue), 2010 FCA 30
(CanLII); Taylor v Canada, 2008 FC 1317 (CanLII), [2009] 2 CTC 173; Beaulieu
v Canada (Attorney General), 2008 FC 1236 (CanLII), [2009] 3 CTC 149; Costabile
v CCRA, 2008 FC 943 (CanLII), [2009] 1 CTC 193; Lanno v Canada (Customs
& Revenue Agency), 2005 FCA 153 (CanLII), [2005] 2 CTC 327 [Lanno];
Hindle v Canada (Customs and Revenue Agency), 2004 FC 625 (CanLII),
[2004] 3 CTC 178; and Plattig v Canada (Attorney General), 2003 FC 1074
(CanLII), [2004] 1 CTC 93).
B.
Should the documentation submitted by the
Applicant which was not before the Minister’s delegate be accepted or considered
by the Court?
[14]
The Respondent submits that certain
documentation in the record was not before the Minister’s delegate when he made
the decision under review and that such documentation should neither be
accepted as evidence nor considered by the Court in its review of the decision.
In particular, the Respondent points to the following documents which should
not form part of the record for purposes of judicial review: namely, a letter
to the Minister’s delegate dated May 15, 2013; a statement of facts and
circumstances dated July 1, 2013 prepared by the Applicant’s tax preparer; a
memorandum of understanding between the Applicant and his corporation dated
September 27, 2014; a summary list of machine lease payments; a working paper
dated December 20, 2006; and a letter dated February 1, 2007.
[15]
I agree with the Respondent that only the
documents and information that were before the Minister’s delegate can be
considered by a reviewing court on judicial review. As a general rule, the
record for judicial review is usually limited to that which was before the
decision-maker; otherwise, an application for judicial review would risk being
transformed into a trial on the merits, when a judicial review is actually
about assessing whether the administrative action was lawful (see: Association
of Universities and Colleges of Canada v Canadian Copyright Licensing Agency
(Access Copyright), 2012 FCA 22 at paras 14-20, 428 NR 297 [Association
of Universities], cited in Gaudet v Canada (Attorney General), 2013
FCA 254 at para 4, [2013] FCJ No 1189 (QL); also see: Bernard v. Canada
(National Revenue), 2015 FCA 263 at paras 13-28, [2015] FCJ No 1396 (QL)).
[16]
There are a few recognized exceptions to the
general rule against the Court receiving evidence which was not before the decision-maker
in an application for judicial review, “and the list of
exceptions may not be closed” (see: Association of Universities
at para 20). Does the documentation which was not before the Minister’s
delegate in this case fall within one of these exceptions as noted in Association
of Universities?
[17]
The first exception involves situations where
affidavits are sometimes necessary to bring the Court’s attention to procedural
defects that cannot be found in the evidentiary record of the administrative
decision-maker, so that the judicial review court can fulfil its role of
reviewing for procedural fairness. I do not see the additional documentation in
this case as being such that it falls within this exception because it does not
offer evidence as to whether the decision under review was rendered in a
procedurally unfair manner. The second exception arises when an affidavit is
received on judicial review in order to highlight a complete absence of
evidence before the decision-maker in making a particular finding. Again, I do
not see the additional documentation in this case as being such that it falls
within this exception because the record before the Minister’s delegate
contained documentation upon which he could ground his finding as to who was
responsible for the lease payments and entitled to a deduction for them. The
third exception can apply when the Court accepts an affidavit that provides
general background in circumstances where such information might assist it in
understanding the issues relevant to the judicial review; in this regard, the
Federal Court of Appeal has cautioned that: “Care must
be taken to ensure that the affidavit does not go further and provide evidence
relevant to the merits of the matter decided by the administrative decision-maker,
invading the role of the latter as fact-finder and merits-decider” (Association
of Universities at para 20). Again, I do not see the additional
documentation in this case as being such that it falls within this exception.
[18]
Accordingly, none of the additional
documentation is admissible as evidence and it must be ignored. It cannot be
and has not been considered by the Court in reviewing the decision of the
Minister’s delegate.
C.
What is the appropriate standard of review?
[19]
The parties submit that the applicable standard
of review in respect of the decision by the Minister’s delegate is one of
reasonableness. I agree (see: Lanno at paras 4 to 7; also see Hoffman
at para 5, and Abraham at para 33).
[20]
Accordingly, although the Court can intervene “if the decision-maker has overlooked material evidence or
taken evidence into account that is inaccurate or not material” (James
v Canada (Attorney General), 2015 FC 965 at para 86, 257 ACWS (3d) 113), it
should not do so if the decision under review is justifiable, transparent, and
intelligible, and it “falls within a range of possible,
acceptable outcomes which are defensible in respect of the facts and law”:
Dunsmuir v New Brunswick, 2008 SCC 9 at para 47, [2008] 1 S.C.R. 190. Those
criteria are met if “the reasons allow the reviewing
court to understand why the tribunal made its decision and permit it to
determine whether the conclusion is within the range of acceptable outcomes”:
Newfoundland and Labrador Nurses’ Union v Newfoundland and Labrador
(Treasury Board), 2011 SCC 62 at para 16, [2011] 3 S.C.R. 708.
[21]
Furthermore, the decision under review must be
considered as an organic whole and the Court should not embark upon a
line-by-line treasure hunt for error (Communications, Energy and
Paperworkers Union of Canada, Local 30 v Irving Pulp & Paper Ltd., 2013
SCC 34 at para 54, [2013] 2 S.C.R. 458). Additionally, “as long as the process and the outcome fit comfortably with
the principles of justification, transparency and intelligibility, it is not
open to a reviewing court to substitute its own view of a preferable outcome”:
see Canada (Citizenship and Immigration) v Khosa, 2009 SCC 12 at para
59, [2009] 1 S.C.R. 339.
[22]
In the present case, the decision made under
subsection 152(4.2) of the ITA is a discretionary one. Subsection 152(4.2)
of the ITA does not provide the Applicant with an entitlement to relief;
on the contrary, it only gives the Applicant “a right
to ask the Minister to exercise his discretion to reassess after the expiration
of the normal reassessment period” (Abraham at para 26). The scope
of judicial review in respect of a decision made under subsection 152(4.2) is,
therefore, “quite narrow” (see: LeBlanc
at para 25); and as noted by the Federal Court of Appeal in Barron v. Canada
(Minister of National Revenue - M.N.R.), [1997] FCJ No. 175 (QL) at para 5,
[1997] 2 CTC 198, when an application for judicial review concerns a decision
made in the exercise of the Minister’s discretion under subsection 152(4.2),
the court may intervene and set aside the decision under review “only if that decision was made in bad faith, if its author
clearly ignored some relevant facts or took into consideration irrelevant facts
or if the decision is contrary to law.”
D.
Was the decision under review unfairly rendered
or substantively unreasonable such that it should be quashed?
[23]
The Applicant contends that the Minister’s
delegate misapprehended or ignored relevant evidence, in particular that his
Corporation was inactive, and, consequently, the Minister improperly and
arbitrarily failed to exercise his discretion under the taxpayer relief
provisions. According to the Applicant, it was unfair for the Minister’s
delegate not to “match” the expenses he incurred
in paying the rental payments for the two machines against the income he earned
by using the machines, and this creates unfairness in view of cases such as Canderel
Ltd v The Queen, [1998] 1 S.C.R. 147, 222 N.R. 81[Canderel] and Imperial
Financial Services Ltd. v Minister of National Revenue, [1991] 1 CTC 2031,
91 DTC 184 [Imperial Financial]. The Applicant says that, although his
corporation’s name was on the lease with CIT, the corporation was in fact
inactive and he, as an individual, earned the income from the machines and the
lease payments he made should be deductible expenses for him.
[24]
The Applicant’s reliance upon Canderel
and Imperial Financial is misguided. Both Canderel and Imperial
Financial dealt with disputes concerning the computation of profit for
income tax purposes and not, as is the case here, the appropriate person
entitled to a deduction for the rental payments on the two machines. Moreover,
the matching principle is not a rule of law which dictates or requires that
expenses must always be matched with profits; it is simply an accounting
principle that a court may or may not consider depending upon the particular
facts and circumstances of a case. In this regard, Justice Iacobucci, writing
for the Supreme Court in Canderel, stated as follows:
43 …I should now like to discuss what
exactly is the question that must be answered when attempting to assess a
taxpayer’s profit for tax purposes. A good place to begin is with the decision
of the Federal Court of Appeal in West Kootenay, supra, where
MacGuigan J.A. stated at p. 6028:
The approved principle is that
whichever method presents the "truer picture" of a taxpayer’s
revenue, which more fairly and accurately portrays income, and which
"matches" revenue and expenditure, if one method does, is the one
which must be followed.
44 In the court below, Stone J.A.
took this passage as grounding his conclusion that the matching principle of
accounting has been elevated to a rule of law. Obviously, in light of my
previous comments, I do not, with respect, subscribe to that point of view. To
my mind, the significance of this statement is to confirm a much sounder
proposition: that the goal of the legal test of "profit" should be to
determine which method of accounting best depicts the reality of the financial
situation of the particular taxpayer. If this is accomplished by applying the
matching principle, then so be it. On the other hand, if some other method is
appropriate, is permissible under well-accepted business principles, and is not
prohibited either by the Act or by some specific rule of law, then there is no
principled basis by which the Minister should be entitled to insist that the
matching principle -- or any other method, for that matter -- be employed.
[25]
The Applicant argues, in essence, that because
the profit generated by the two machines ultimately went into his pocket and he
paid taxes on such profit, the deduction for rental payments for the machines
should also “match” and be attributed and
available to him. This argument, however, is fatally flawed because it ignores
the basic fact of the matter; that is, that the lease agreement with CIT for
the machines was in the name of the Applicant’s corporation and not in the name
of the Applicant. The Applicant chose to collect revenue generated by the
machines personally, rather than through his corporation, and he cannot rely
upon an accounting principle to ignore the legal reality of the lease and argue
that the cost of the lease payments should be attributed to him personally and
deductible from his personal income for the 2001 taxation year. In my view, it
was reasonable for the Minister’s delegate to deny the Applicant a personal
deduction for the rental payments because the Applicant’s corporation, not the
Applicant, was responsible for such payments under the lease agreement and, as
the delegate noted, the rental expenses were deductible against income earned
by the corporation.
[26]
I reject the Applicant’s submission that the
Minister’s delegate ignored relevant evidence or misapprehended the facts such
that his decision was rendered in a procedurally unfair manner or otherwise
unreasonable. The Applicant does not point to any evidence in the record that
shows the Minister’s delegate misapprehended or ignored any material facts. It
is true that the decision does not explicitly address the Applicant’s assertion
that his corporation was inactive and that the Minister’s delegate ignored or
misapprehended this fact, one which the Applicant characterizes as being
significant. However, it is not completely accurate to assert, as the Applicant
does, that his corporation was inactive because, even if it may not have been
earning any income, it was nonetheless active at least to the extent it
incurred monthly obligations for the rental payments. Moreover, even if the
Applicant’s corporation was simply a shell, it was a shell that nevertheless
was the party to the lease agreement with CIT and protected the Applicant from
personal liability for the rental payments. In my view, it was not unreasonable
for the Minister’s delegate to determine that the Applicant’s corporation,
rather than the Applicant, should benefit from any deduction for the rental
payments since it had the liability for the rental payments. As noted by the
Federal Court of Appeal in R v Friedberg, [1991] FCJ No 1255 (FCA), aff’d
[1993] 4 S.C.R. 285, a case where the taxpayer was denied a deduction for a gift
he funded for a museum to acquire a collection of textiles because he had not
acquired title to the collection:
5 In tax law, form matters. A mere
subjective intention, here as elsewhere in the tax field, is not by itself
sufficient to alter the characterization of a transaction for tax purposes. …If
a taxpayer fails to take the correct formal steps…tax may have to be paid. If
this were not so, Revenue Canada and the courts would be engaged in endless
exercises to determine the true intentions behind certain transactions.
…evidence of subjective intention cannot be used to "correct"
documents which clearly point in a particular direction.
[27]
In short, I find that the decision made by the
Minister’s delegate was a reasonable one and not rendered in an unfair manner.
IV.
Conclusion
[28]
The Court’s intervention is not required in this
case. The decision of the Minister’s delegate is justifiable, transparent, and
intelligible, and it falls within a range of possible, acceptable outcomes
which are defensible in respect of the facts and law.
[29]
The Respondent has requested costs. Since the
application has been dismissed, the Respondent is entitled to costs in such
amount as may be agreed to by the parties. If the parties are unable to agree
as to the amount of such costs within 15 days of the date of this judgment, the
Respondent shall thereafter be at liberty to apply for an assessment of costs
in accordance with the Federal Courts Rules, SOR/98-106.
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