Date: 20080728
Docket: T-1918-07
Citation: 2008
FC 917
Victoria, British
Columbia, July 28, 2008
PRESENT: The Honourable Mr. Justice Campbell
BETWEEN:
DENNIS
NIXON
Applicant
and
MINISTER
OF NATIONAL REVENUE
Respondent
REASONS FOR ORDER AND ORDER
[1]
In 2003, Mr. Nixon
failed to report $4,000 of income, and for the 2005 taxation year he again
failed to report dividend income totaling $183,988 paid to him by his company.
As a result, the Minister of National Revenue (Minister) lawfully imposed a
penalty totaling $36,796 on Mr. Nixon for repeated failure to report income
under the Income Tax Act R.S.C. 1985, c. 1 (5th Supp.) (Act).
As Mr. Nixon felt the imposition of this penalty to be excessive given the
circumstances of his failures to report, he made a first level request under
the taxpayer relief provisions of the Act that the penalty be canceled.
This request was rejected, and, as a result, Mr. Nixon’s accountant made a
second level re-evaluation request on his behalf. However, this request was
also rejected on October 3, 2007; it is this rejection (Decision) that is
the subject of the present Application.
[2]
The question for
determination is whether the Decision is reasonable. It is agreed that the
appropriate standard of review to apply to a Minister’s decision under the
taxpayer relief provisions is reasonableness (Lanno v. Canada (Customs and Revenue Agency) 2005 FCA 153, 2005 D.T.C. 5245). Counsel
for the Respondent argues that, in order for the Decision to be found to be
unreasonable, the decision must be found to be in error pursuant to s.18.1(4)
of the Federal Courts Act. However, Counsel for Mr. Nixon argues that
for the Decision to be reasonable, it must be judged on the standard of common
sense. I find that both arguments find a place in the reasonableness standard
for judicial review set by the Supreme Court of Canada in Dunsmuir v. New Brunswick, 2008 SCC 9, [2008] S.C.J. No. 9 at para. 47:
Reasonableness
is a deferential standard animated by the principle that underlies the
development of the two previous standards of reasonableness: certain questions
that come before administrative tribunals do not lend themselves to one
specific, particular result. Instead, they may give rise to a number of
possible, reasonable conclusions. Tribunals have a margin of appreciation
within the range of acceptable and rational solutions. A court conducting a
review for reasonableness inquires into the qualities that make a decision
reasonable, referring both to the process of articulating the reasons and to
outcomes. In judicial review, reasonableness is concerned mostly with the
existence of justification, transparency and intelligibility within the decision-making
process. But it is also concerned with whether the decision falls within a
range of possible, acceptable outcomes which are defensible in respect of the
facts and law.
[Emphasis added]
That is, if the Decision is not defensible in respect of the
facts of Mr. Nixon’s case and the law with respect to the relief provisions
applied to them, it is unreasonable. For the reasons which follow, I find that
on the application of the Dunsmuir criteria, the Decision is not reasonable
and must be set aside.
I. Penalty
and Taxpayer Relief Provisions of the Act
[3]
The
penalty to be applied under the Act applicable to taxpayers who have
failed to report income more than once in the previous three years is specific:
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163 (1) Every person who (a) fails to report an amount
required to be included in computing the person’s income in a return filed
under section 150 for a taxation year, and (b) had failed to report an amount
required to be so included in any return filed under section 150 for any of
the three preceding taxation years
is liable to a penalty equal to 10% of the amount
described in paragraph 163(1)(a), except where the person is liable to a
penalty under subsection 163(2) in respect of that amount.
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163 (1) Toute personne qui ne déclare pas
un montant à inclure dans le calcul de son revenu dans une déclaration
produite conformément à l’article 150 pour une année d’imposition donnée et
qui a déjà omis de déclarer un tel montant dans une telle déclaration pour
une des trois années d’imposition précédentes est passible d’une pénalité
égale à 10 % du montant à inclure dans le calcul de son revenu dans une telle
déclaration, sauf si elle est passible d’une pénalité en application du
paragraphe (2) sur ce montant.
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However, by s. 220(3.1) of the Act, the Minister has
authority to apply unfettered discretion to grant relief from the operation of
s. 163(1) as well as other penalty provisions in the Act:
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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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II. The
Taxpayer Relief Guidelines: Information Circular 07-1 (IC 07-1)
[4]
The Minister’s
authority to grant relief is delegated to various officials of the Canada
Revenue Agency (CRA) pursuant to s. 220(2.01) of the Act, and a
two-level review system has been developed to assess taxpayer relief requests.
As might be expected in the situation where taxpayers will apply for relief
from delegates of the Minister in a wide range of fact circumstances across Canada, to bring some uniform standard to the decision-making
process, the CRA has published guidelines which state situations in
which relief might be appropriate to grant. The most recent version of the
guidelines is dated May 31, 2007 as IC
07-1 and these were applied to Mr. Nixon’s application for relief (Guidelines)
(see Respondent’s
Application Record Tab A).
[5]
A detailed
consideration of the Guidelines is important with respect to the present
Application because it appears that the Decision was rendered under a
misapprehension of their content. As set out above, s. 220(3.1) of the Act
gives broad open-ended discretion to the Minister in granting penalty relief,
and, of course, this discretion is available to the Minister’s delegates in
considering specific situations presented by applying taxpayers. The Guidelines
are careful to state that this broad legally approved discretion is not
affected by the Guidelines:
6. These are only guidelines.
They are not intended to be exhaustive, and are not meant to restrict the
spirit or intent of the legislation.
[6]
The
point that the Guidelines are not exhaustive of the circumstances that might
warrant positive discretion to be exercised under s. 220(3.1) of the Act is
important because it gives direction on how to treat the following statements:
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
24. The Minister may also grant relief if a
taxpayer's circumstances do not fall within the situations stated in ¶23.
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.
[Emphasis added]
As can be seen, the situations suggested in paragraph 23,
and the definition of what constitutes “extraordinary circumstances” in
paragraph 25, are not meant to limit the discretion that can be applied.
Paragraph 24 makes it clear that each application for relief must be decided on
its own merits. For clarity, this point is repeated in paragraph 11:
11. The Minister does not have to
grant relief under the taxpayer relief provisions. Each request will be
reviewed and decided on its own merit. If relief is denied or partly granted,
the CRA will provide the taxpayer with an explanation of the reasons and
factors for the decision.
III. The Decision
[7]
Mr. Nixon’s
main ground for relief is that the failures to report income were unintentional
and that the imposition of such a significant penalty is unfair in the
circumstances. Mr. Nixon’s application was denied on the first level review
which resulted in his request for a second level evaluation. To assist the
second level decision-maker to reach the Decision, a report was prepared by
another official of the CRA which sets out the circumstances of the failures to
report and contains some subjective evaluation of Mr. Nixon’s arguments
(Report). It is agreed that the Report constitutes part of the reasons for
Decision.
[8]
The Report
contains the following observations:
Aside from these two omissions of income,
the taxpayer otherwise has a good compliance history: no delinquent action has
been taken; no late filing penalties have been assessed; and the tax debts for
other years have been paid within a reasonable amount of time
[…]
The omissions penalties assessed [under
ss. 163(1)] total $36, 796, which does seem harsh. Although ss. 163(2) gross negligence
penalties are intended to be more severe, in Mr. Nixon’s case I considered
substituting a ss. 163(2) penalty as had such a penalty been assessed, the
penalty amount would have been reduced to $23,244, which is a savings of
$13,522, calculated as:
Federal tax payable - $28, 826.09 X 50% $14,413.05
Provincial tax payable - $17, 663.52 X
50% $8,831.76
ss. 163(2) penalties $23,
244.78
Less: ss. 163(1) penalties already
assessed $36,797.60
Decrease in penalties $13,
552.82
Subsection 163(2) penalties apply to
increases in income of more than $5,000 and as such, the $183,988 increase to
Mr. Nixon’s income would more than qualify in this respect. However, as the
taxpayer has not requested this application or admitted to a wilful failure as
required by TOM 19(15)2.2, I have not pursued this issue in light of our
parallel Regional policy.
[Emphasis added]
(Report, Respondent’s Record, p. 40 and
42)
However, despite the perceived harshness of the penalty, the
Report concludes that Mr. Nixon’s situation is not one which qualifies for
relief:
In making this recommendation, I have
reviewed the relevant paragraphs of IC 07-1 regarding extraordinary
circumstances.
The taxpayer clearly had the ability to
pay his 2005 tax debt including the ss. 163(1) omissions penalty without
causing undue financial hardship; his after-tax income for 2005 and 2006 was
$579,302 and $267,995, respectively; he was able to contribute a total of $41,
760 to his RRSPs in those years; and, he has paid a total of $72,107 towards
his 2005 T1 debt.
[…]
I recommend that the taxpayer’s request
to cancel the ss. 163(1) omissions penalties assessed to his 2005 T1 return be
denied on the basis that losing his T5 slip and forgetting to report his
dividend income is not an extraordinary circumstance to which the Taxpayer
Relief provisions would apply.
[Emphasis added]
(Report, Respondent’s Record, p. 42-43)
[9]
It seems
that the writer of the Report was sympathetic to Mr. Nixon’s plea for relief.
Indeed, that person went so far as to consider whether Mr. Nixon’s failures to
report could be dealt with under a different section of the Act which
would result is a lesser penalty. Nevertheless, the way the Report reads, the
writer felt bound to recommend that Mr. Nixon is not a candidate for relief
because the facts of his case do not constitute “extraordinary circumstances”.
[10]
In
conformity with the statements made in the Report, a key finding in the
Decision is as follows:
While I appreciate that Mr. Nixon acted quickly to remedy
the omission in his response to the matching letter that was sent to him in
mid-December 2006 and the advance payment he made of $50,000 prior to the
issuance of the Notice of Reassessment in January 2007, after careful
consideration, I must advise that I concur with the first level decision to
deny the cancellation of the omissions penalties assessed to his 2005 T-1
return under the Taxpayer Relief provisions. Although I believe that the
omission was unintentional, the reasons for the omission are not extraordinary
circumstances for the Taxpayer Relief provisions would apply [sic] and the
situation was not beyond his control.
(Rejection Letter, Applicant’s Record, p. 6)
IV. Is the Decision Reasonable?
[11]
My answer
to the question is “no”. It is obvious that both the writer of the Report and
the official who rendered the Decision concluded that, unless Mr. Nixon could
prove that he did not report due to “extraordinary circumstances”, he did not
qualify for relief. I find that this interpretation is contrary to s. 220(3.1) of the Act and is a misapprehension of the
content of the Guidelines. The Dunsmuir test requires that the Decision
must “[fall] within a range of
possible, acceptable outcomes which are defensible in respect of the facts and
law”. In my opinion, the Decision is not defensible because it is based on a
misapprehension of the scope of the discretion authorized by s. 220(3.1) of the
Act. As a result, the Decision must be set aside.
ORDER
Pursuant to s.18.1(3) of the Federal Courts Act, the
decision under review is set aside.
Costs of the Application are awarded to Mr. Nixon.
“Douglas
R. Campbell”
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