Date: 20100923
Docket: T-2165-09
Citation: 2010 FC 950
Ottawa, Ontario, September 23,
2010
PRESENT: The Honourable Mr. Justice Phelan
BETWEEN:
PETER
LIVADITIS
Applicant
and
CANADA
REVENUE AGENCY
Respondent
REASONS FOR JUDGMENT AND JUDGMENT
I. INTRODUCTION
[1]
The
Applicant received a telephone call from a Canada Revenue Agency (CRA) official
concerning records related to first purchasers of units in a condominium. Shortly
thereafter, he disclosed to the CRA that he had failed to report capital gains
on the sale of his condo unit in 2006.
[2]
The
Applicant applied under the CRA’s Voluntary Disclosure Program (VDP) for relief
from penalty and interest on the previously undisclosed capital gain. The
application was denied by the Minister through his Delegate (an official of
CRA) and this Applicant, as well as four of his family members whose similar cases
have been stayed pending this decision, applied for judicial review of the
denial of relief from penalty.
II. FACTUAL
BACKGROUND
[3]
Section
220(3.1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
gives the Minister of National Revenue a broad discretion to waive or cancel
penalties otherwise payable. The VDP is a program established under the Income
Tax Act and the Excise Tax Act for the purposes of encouraging the
disclosure of information which ought to have been properly reported. There are
a number of conditions which must be met for a taxpayer to gain the benefits of
this discretion.
[4]
The
VDP requires four conditions to be met:
(a) that
the disclosure be voluntary;
(b) that
the disclosure be complete;
(c) that
the disclosure involve the application, or potential application, of a penalty;
and
(d) that
the disclosure include information that is at least one year past due or less
than one year past due where the disclosure is to correct a previously filed
return.
In the instant case, the sole
issue is the voluntariness of the disclosure. It is conceded that the Applicant
met the other three conditions.
[5]
The
term “voluntariness” is further described in the VDP 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]
The
CRA recognizes that not all enforcement actions automatically invalidate a
disclosure. Where there has been enforcement action taken, CRA has to focus on
the following questions:
(a) Was
any direct contact by a CRA employee, other authority or administration, for
any reason relating to non-compliance (e.g. unfiled returns, audit, collection
issues) made with the taxpayer or is the taxpayer likely to have been aware of
the enforcement action?
(b) Was
any enforcement action initiated against a person associated with, or related
to, the taxpayer or a third party, where the enforcement action is sufficiently
related to the present disclosure, and is likely to have uncovered the
information being disclosed?
[7]
A
negative answer to either of the preceding questions would result in the
disclosure being voluntary.
[8]
In
the present case, Mr. Livaditis was President of LaCaille Fifth Avenue Inc. The
company’s business included the development of new residential condominium
projects including a project called “Five West” in downtown Calgary.
[9]
In
2003 the Applicant and four of his family members personally acquired
condominium units in the Five West project from Fifth Avenue Inc. before
construction began. In 2006 the members of the family resold their condominium
units in the Five West project for a gain prior to the completion of the
project.
[10]
The
gains derived from the sale of these units were not reported as income by the
Applicant or his family members. For the Applicant, the capital gain that went
unreported amounted to $253,100.00.
[11]
On
October 28, 2008, Mr. Livaditis received a telephone call from the CRA
official, Mr. Friesen. The Applicant’s and CRA’s descriptions of that telephone
call are almost diametrically opposed.
[12]
Mr.
Livaditis claims that the conversation was very brief and general. The CRA
representative called to tell him that the CRA was gathering some information
pertaining to purchasers who may have condominium units in the Five West
project. Mr. Livaditis claims that he referred the call to his colleague Mr.
Schmidt and then forwarded the caller’s contact information to Mr. Schmidt,
telling him that he understood that the CRA was interested in a meeting to
gather information in respect of purchasers who had acquired condominium units
in the Five West project. Mr. Livaditis claims that he was not made aware that the
CRA had obtained an ex parte order authorizing the Minister to impose a
requirement to provide information on the Five West project.
[13]
On
the other hand, Mr. Friesen, and through him Mr. Mah who provided an affidavit
in this matter, says that he informed Mr. Livaditis that the CRA had obtained
an unnamed person requirement (UPR) which it intended to serve on LaCaille
Fifth Avenue Inc. Mr. Friesen also claims that he advised the Applicant that
the purpose of the UPR was to determine if condominium units in the Five West
project had been sold for a profit by persons who had bought but never lived in
the units and had failed to report the proceeds of sale either as capital gain
or as income. Mr. Friesen advised Mr. Livaditis that the CRA would be seeking
the names of the first-time buyers of each of these units.
[14]
On
October 31, 2008, three days after the disputed telephone call, Mr. Livaditis
and his family members, through their accountant, made a voluntary disclosure
request in relation to their unreported income.
[15]
Four
days later, an Order of this Court issued by Justice Mactavish was served on
LaCaille Fifth Avenue Inc. requiring the production of that information and
documents in respect of the group of unnamed persons who had acquired condo
units in Five West.
[16]
On
March 25, 2009, the Respondent denied the Applicant’s request for the waiver or
cancellation of penalty and interest under the VDP for the 2006 tax year. The
denial applied to Mr. Livaditis’ family members as well.
[17]
Mr.
Livaditis filed a second level voluntary disclosure application contesting the
first level decision. That second level application was denied on December 1,
2009, and forms the basis for this judicial review.
[18]
In
the second level decision (the reasons are contained in a memo prepared by Mr.
Mah and approved by the Delegate), the Delegate appeared to have accepted Mr.
Friesen’s description of the telephone call with Mr. Livaditis. The Delegate
concluded that Mr. Livaditis was fully aware of the information requested and
how that information would disclose that income from the sales of the condos
was not reported.
[19]
There
are no reasons given for accepting Mr. Friesen’s version of events. However,
the finding addresses the first question on voluntariness:
Was any direct contact by a CRA employee,
other authority or administration, for any reason relating to non-compliance
(e.g. unfiled returns, audit, collection issues) made with the taxpayer or is
the taxpayer likely to have been aware of the enforcement action?
[20]
The
Delegate then turns to the second question, as to whether a disclosure could be
considered not voluntary. The question to be addressed was:
Was any enforcement action initiated
against a person associated with, or related to, the taxpayer or a third party,
where the enforcement action is sufficiently related to the present disclosure
and is likely to have uncovered the information being disclosed?
[21]
The
Delegate concluded that enforcement action had been initiated against a company
of which Mr. Livaditis was President and thus related to or associated with him.
The Order of Justice Mactavish required LaCaille Fifth Avenue Inc. to provide
the condo investor names which would include those of Mr. Livaditis and his
family members. It was the Delegate’s conclusion that the enforcement action
(the UPR) directly related to the taxpayer’s disclosure and would have
uncovered the information being disclosed. Therefore, the disclosure was not
voluntary.
III. ANALYSIS
[22]
The
central issue before this Court is whether the decision of December 1, 2009
made by the Minister’s Delegate refusing to exercise the discretion to waive or
cancel all or any portion of the penalty assessed against the Applicant in
respect of his 2006 taxation year was unreasonable.
[23]
An
issue was raised regarding facts included in an affidavit filed by the
Applicant which had never been put to the Delegate. This issue was not pressed
at the Court hearing.
[24]
The
standard of review in respect of this type of Ministerial exercise of
discretion has been established as reasonableness (Telfer v. Canada (Revenue
Agency),
2009 FCA 23). On any issue of procedural fairness – an issue more fully
developed in oral argument than in the Applicant’s Record – the standard is
correctness (Wong v. Canada (Minister of National
Revenue – M.N.R.), 2007 FC 628).
[25]
In
examining “reasonableness”, the Court considers the decision-making process – of
which the reasons are a part – to ensure that there is a rational justification
for the decision and that it is transparent and intelligible. The Supreme
Court’s reference in Dunsmuir v. New Brunswick, 2008 SCC 9
at paragraph 47 to the decision falling within a “range of possible, acceptable
outcomes” refers to more than just the ultimate result of the process. It also
takes into account the manner in which the result is achieved.
[26]
In
the present case, the discretion at issue is broad and exceptional. It can
afford a taxpayer relief from what would otherwise be owed by operation of the Income
Tax Act and the Excise Tax Act. However, the deference owed is
context specific and relates to the issue in dispute.
[27]
The
Applicant raised the issue of whether the Delegate’s decision was arrived at
fairly. He relied, to some extent, on this Court’s decision in Wong,
above. That reliance is not entirely well placed, however, since in Wong
the Applicant had been induced into believing that he would qualify under the
VDP when he disclosed the details of his tax situation. In the present case,
there was no such inducement or belief; the Applicant knew that his VDP status had
not yet been determined. The frailties of the Wong situation are only
applicable in the present case in respect of principles of fairness.
[28]
The
area where the Delegate’s decision is legally infirmed is in the acceptance of
Mr. Friesen’s account of the October 28, 2008 telephone call over that of Mr.
Livaditis. No rationale is provided for the Delegate, an official of the CRA,
preferring the account of a fellow CRA official over that of the taxpayer.
While weight of evidence is part of the exercise of discretion, there is no
reference to the weighing of one version over the other. There may have been
good reason for accepting Mr. Friesen’s version, but without explanation it
cannot be said that the outcome is acceptable, or “defensible in respect of the
facts and law”.
[29]
It
can also be said that the failure to articulate such rationale is unfair. It
deprives the Applicant of the right to know why he was not believed and to then
seek judicial review of the reasonableness of that decision.
[30]
This
is not a situation of deference owed to the decision maker on an issue of
credibility. The Delegate was in no special position to assess credibility as
this was a paper exercise and without interview or presence of Mr. Livaditis.
[31]
Any
other form of deference owed on the basis of the exercise of discretion is
tempered by the concern that preferring the evidence of a CRA official simply
because he is with the CRA over the evidence of a taxpayer would not, in and of
itself, be appropriate.
[32]
If
the Delegate’s decision rested solely on the first question posed in the VDP,
this judicial review would have to be granted. The Delegate’s decision on that
question is neither within the range of acceptable outcomes nor was the process
fair.
[33]
However,
the Respondent argued that even if the Applicant’s version of events was
accepted, the Delegate’s decision would be reasonable because there was direct
contact with the taxpayer, the reason for such contact was non-compliance
and/or the taxpayer is likely to have been aware of enforcement action before
making disclosure.
[34]
The
difficulty with the Respondent’s argument is that it does not reflect how the
Delegate actually decided the matter. Mr. Livaditis’ version was not accepted
and he specifically denied any such awareness of enforcement action.
[35]
The
Court is mindful that on Mr. Livaditis’ account of events, he was aware that the
CRA had an interest in the initial group of condo owners and that he and his
family fell into the group who were the subject of CRA inquiry. Furthermore,
Mr. Livaditis made immediate disclosure after the contact with CRA. However, it
is neither appropriate nor necessary to answer the hypothetical question of
whether, on those facts, the Delegate could have reached a reasonable decision
that the disclosure was “not voluntary” – he did not do so.
[36]
However,
the Delegate’s second ground for finding the disclosure “not voluntary” is nonetheless
reasonable. This second ground does not involve the issue of taxpayer awareness
of the existence of an enforcement action. It was reasonable to conclude on the
facts that the enforcement action – the UPR and Court Order – was against a
person (in the form of the company) which was associated with Mr. Livaditis. He
was both a shareholder and officer of the company. The enforcement action had
been initiated before disclosure and it would have uncovered the same
information as was ultimately disclosed. It is also reasonable to conclude that
the enforcement action would have uncovered Mr. Livaditis’ purchase and sale of
the condo unit.
[37]
There
is no basis for contending, as the Applicant does, that the enforcement action,
which seeks information about the purchasers of the condo units of whom the
Applicant is one, is not sufficiently related to the Applicant’s disclosure. In
any event, it was reasonable for the Delegate to conclude that there was
sufficient nexus between enforcement and the Applicant’s disclosure.
IV. CONCLUSION
[38]
Therefore,
this Court concludes that the decision was reasonable in respect of one issue
and is sufficient to justify a conclusion that the Applicant’s disclosure was
“not voluntary” under the VDP.
[39]
This
judicial review will be dismissed with costs.
JUDGMENT
THIS COURT
ORDERS AND ADJUDGES that the
application for judicial review is dismissed with costs.
“Michael
L. Phelan”
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