Date: 20081103
Docket: T-2176-05
Citation: 2008 FC 1217
Ottawa, Ontario, November 3, 2008
PRESENT: The Honourable Mr. Justice Kelen
BETWEEN:
JOHN
BERGET
Applicant
and
THE
ATTORNEY GENERAL OF CANADA
Respondent
REASONS FOR JUDGMENT AND JUDGMENT
[1]
This
is an application for judicial review of a “fairness” decision of the Minister
of National Revenue (the Minister) denying the applicant’s request to reassess
the applicant’s 1997 and 1998 tax returns pursuant to subsection 152(4.2) of
the Income Tax Act, 1985, c.1, (5th Supp), (the Act). The
applicant requested that the Minister remove $1,106,000 from the applicant’s
income for the 1997 tax year and $125,000 from the applicant’s income for the
1998 tax year, on the basis that this income was never received. The Minister,
by way of the “Fairness Committee,” found that there was insufficient proof
that these amounts were not paid to the applicant and thus denied the request.
FACTS
[2]
The
applicant is the President of Southland Development Corp, which is in the business
of real estate development in Alberta. At all times material
to this application, the applicant was also a Director of Southland Development
Corp. (“Southland”). Southland is owned by companies related to the applicant.
[3]
The
accounting firm of Coopers & Lybrand, subsequently known as Price
Waterhouse Coopers (the “former accountants”), prepared financial statements and
tax returns for Southland for the 1996-1999 tax years, and for the applicant
for the 1997 and 1998 tax years.
[4]
In
preparing the financial statements and T2 corporate income tax returns for
Southland for the 1996 tax year, the former accountants deducted as an expense
an accrued amount of “Director’s Fees,” payable to the applicant, in the amount
of $1,106,000. This amount was reported as taxable income on the applicant’s
personal income tax return for the 1997 tax year (the “1997 Director’s Fee”).
Southland’s 1998 tax return, prepared by the former accountants, deducted an accrued
amount of $125,000 in “Director’s Fees.” This amount was reported as taxable
income on the applicant’s 1998 personal income tax return (the “1998 Director’s
Fee”).
[5]
The
applicant states that he has never been paid any portion of the 1997 or 1998
Director’s Fees.
[6]
In
2000, on advice of his counsel, the applicant retained another accounting firm,
Kingston Ross Pasnak (the “current accountants”), to review his personal, and
Southland’s corporate financial statements and tax returns, and, where
necessary, amend the tax returns previously prepared by the former accountants.
[7]
The
review conducted by the current accountants resulted in several adjustments.
The adjustments relevant to this application were:
a. deleting the 1997
Director’s Fee from the applicant’s taxable income for the 1997 tax year, and
reducing the corresponding credit to the applicant’s director’s loan account
with Southland; and
b. deleting the
1998 director’s fee from the applicant’s taxable income for the 1998 tax year,
and reducing the corresponding credit to the applicant’s director’s loan
account with Southland.
[8]
Based
upon the advice of the current accountants, Southland and the applicant
submitted their adjustment requests to the Minister. These requests were
referred to the Minister’s Audit section. The request by Southland was pursuant
to a voluntary disclosure provision because subsection 152(4.1) of the Act does
not apply to corporations.
[9]
The
Minister audited Southland and issued reassessments for its 1996, 1998, 1999
and 2000 tax years. The reassessments resulted in a credit balance of $399,993.75
owing to Southland. Southland objected to the reassessments. The Minister’s
appeals officer Brenda Solo reviewed and ultimately did not allow any of the
objections for the corporation Southland. Southland did not appeal to the Tax
Court of Canada, as it was entitled to do.
[10]
By
letter dated February 10, 2004, the applicant requested that the Canada Revenue
Agency reassess, pursuant to subsection 152(4.2) of the Act, his 1997 and 1998
tax returns to remove the 1997 and 1998 Director’s Fees from his taxable
income. Due to her earlier involvement as Appeals Officer in the objection to
Southland’s corporate reassessment, Ms. Solo was assigned the applicant’s
request for a refund of taxes paid. She prepared a report for the Fairness
Committee consisting of Sandra Foy and Sheila Lusk.
[11]
After
reviewing the materials and information in her possession, Ms. Solo recommended
that the Minister deny the requested reassessment of the applicant’s income tax
for the 1997 and 1998 years. The Fairness Committee decided, in a letter from
Sandra Foy dated November 9, 2005 that the refund fairness request must be
denied. The applicant seeks to set aside this decision.
ISSUE
[12]
The
issue in this application is whether the Minister properly exercised his
discretion in refusing the applicant’s fairness application to delete the 1997
and 1998 Director’s Fees from his personal taxable income in those tax years.
STANDARD OF REVIEW
[13]
In
Dunsmuir v. New Brunswick, 2008 SCC 9, 372 N.R. 1, the Supreme Court of
Canada held at paragraph 62 that the first step in conducting a standard of
review analysis is to “ascertain whether the jurisprudence has already
determined in a satisfactory manner the degree of [deference] to be accorded
with regard to a particular category of question.”
[14]
In
Lanno v. Canada (Customs and Revenue Agency), 2005 FCA
153, 334 N.R. 348, the Federal Court of Appeal held that discretionary
decisions under s. 152(4.2) of the Income Tax Act are subject to review on a
standard of reasonableness. Accordingly, the Court will review this decision
on a “reasonableness” standard.
[15]
In
reviewing the Minister’s decision on a standard of reasonableness, the Court is
concerned with whether the decision falls within a range of “possible,
acceptable outcomes which are defensible in respect of the facts and law.” (Dunsmuir,
supra, at paragraph 47.)
ANALYSIS
The
legislation for discretionary relief against normal Income Tax Act deadlines
for reassessing income tax returns to reduce tax payable
[16]
Subsection
152(4.2) of the Act gives the Minister the discretionary authority to make a
reassessment or a redetermination beyond the normal three-year reassessment
period for a statute-barred tax year, when requested by an individual or a
testamentary trust in order to grant a refund or to reduce tax payable.
Subsection 152(4.2) provides:
|
152. (4.2) Notwithstanding
subsections (4), (4.1) and (5), for the purpose of determining, at any time
after the end of the normal reassessment period of a taxpayer who is an
individual (other than a trust) or a testamentary trust in respect of a
taxation year, the amount of any refund to which the taxpayer is entitled at
that time for the year, or a reduction of an amount payable under this Part
by the taxpayer for the year, the Minister may, if the taxpayer makes an
application for that determination on or before the day that is ten calendar
years after the end of that taxation year,
(a) reassess tax, interest or
penalties payable under this Part by the taxpayer in respect of that year;
and
(b) redetermine the amount, if
any, deemed by subsection 120(2) or (2.2), 122.5(3), 122.51(2), 122.7(2) or
(3), 127.1(1), 127.41(3) or 210.2(3) or (4) to be paid on account of the
taxpayer’s tax payable under this Part for the year or deemed by subsection
122.61(1) to be an overpayment on account of the taxpayer’s liability under
this Part for the year.
|
152. (4.2) Malgré les paragraphes (4), (4.1) et
(5), pour déterminer, à un moment donné après la fin de la période normale de
nouvelle cotisation applicable à un contribuable — particulier, autre qu’une
fiducie, ou fiducie testamentaire — pour une année d’imposition le
remboursement auquel le contribuable a droit à ce moment pour l’année ou la
réduction d’un montant payable par le contribuable pour l’année en vertu de
la présente partie, le ministre peut, si le contribuable demande pareille
détermination au plus tard le jour qui suit de dix années civiles la fin de
cette année d’imposition, à la fois :
a) établir de nouvelles cotisations concernant l’impôt, les
intérêts ou les pénalités payables par le contribuable pour l’année en vertu
de la présente partie;
b) déterminer de nouveau l’impôt qui est réputé, par les
paragraphes 120(2) ou (2.2), 122.5(3), 122.51(2), 122.7(2) ou (3), 127.1(1),
127.41(3) ou 210.2(3) ou (4), avoir été payé au titre de l’impôt payable par
le contribuable en vertu de la présente partie pour l’année ou qui est
réputé, par le paragraphe 122.61(1), être un paiement en trop au titre des
sommes dont le contribuable est redevable en vertu de la présente partie pour
l’année.
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[17]
The
Federal Court of Appeal has referred to this subsection as part of a statutory
scheme to bring fairness to our tax laws. See Lanno (above) per Sharlow
J.A. at paragraph 2. In Lanno at paragraph 6 Madam Justice Sharlow described
the discretionary decision under this subsection:
1.
this “fairness
provision” is to grant relief for taxpayers from the undue hardship caused by
the complexity of the tax laws and procedural issues in cases where they are
entitled to a refund or reduction in tax payable but have missed the normal
deadlines in the tax law for obtaining such relief;
2.
the
granting of relief is discretionary;
3.
the discretionary
decision cannot be appealed to the Tax Court, only to the Federal Court by
judicial review; and
4.
the decision
is subject to a reasonableness standard of review.
[18]
In
exercising this discretion, the Minister is guided by Information Circular 92-3
(subsequently replaced by IC 07-1), which sets out Guidelines for Refunds or
Reduction in Amounts Payable Beyond the Normal Three-Year Period.
[19]
Information
Circular 92-3 provides that a tax-payer may request in writing that the
director of an appropriate district tax office review the situation if the
taxpayer disagrees with the fairness decision. In this way, there is a second
level of review aside from the original decision. The applicant did not request
a second level of review from the November 9, 2005 decision under review, even
though expressly invited to do so by the respondent.
The Applicant’s Position
[20]
The
applicant alleges that the Minister erred in denying the fairness application
for the following reasons:
a. the Minister
ignored income tax law that in order for income from an office or employment to
be taxable, it must be received;
b. the Minister
ignored materials that establish:
i.
The
applicant’s borrowing and lending of funds to Southland was not a source of
income; and
ii.
The
applicant’s true taxable income for 1997 and 1998 tax years as shown in extensive
and detailed calculations performed by the current accountants.
c. the Minister
exhibited a reasonable bias, because the same Appeals Officer, Ms. Solo,
rendered decisions on identical issues for both the applicant and Southland.
The Respondent’s
Position
[21]
After
reviewing the applicant’s file, Ms. Solo set out the following conclusions in
her report to the Fairness Committee as the basis for recommending that the
applicant’s fairness request be denied:
a. there was a
lack of certainty as to the account balance of the “Due to Director” account in
Southland at the material times;
b. the applicant
did not provide sufficient records to substantiate the credits for the “Due to
Director” account for the material taxation years of Southland;
c. amounts
posted as debit and credits in the “Due to Director” account were significant
over the taxation years of Southland in respect of 1996 to 2000;
d. the personal
guarantees of the applicant as Director were not accepted as valid credits in
respect of the “Due to Director” account;
e. the applicant
voluntarily reported the Director Fees in his 1997 and 1998 income tax returns;
f.
the
review of Southland’s tax returns was not an extensive review of the “Due to
Director” account but rather restricted to items outlined in Southland’s
submission;
g. “the
collections diary” revealed a long history of non-compliance by the applicant;
h. it was
unclear why Southland would have remitted cheques to the tax department on
behalf of the applicant if, at the time of the remittance, the applicant did
not believe he was indebted for these taxes; and
i.
the
applicant proposed arrangements on an ongoing basis to the CRA to pay his
personal tax arrears balance in full. These payments were made by Southland and
were debited against the “Due to Director” account.
[22]
The
applicant’s total income declared in the 1997 tax return was $1,725,610.80.
Attached to this income tax return is a T4A slip from Southland showing income
to the applicant in the amount of $1,106,000.00 for director’s fees.
The
Fairness Committee decision
[23]
The
Fairness Committee decision under review dated November 9, 2005 from Sandra
Foy, Team Leader, Edmonton Tax Service office stated:
1.
“…we note
that substantial debit entries and credit entries have been posted against the
Director’s loan account for Mr. Berget.
2.
We have
requested verification for the substantial credit entries posted against the
Director’s loan account and have been advised that this documentation is not
available.
3.
We have
been provided with two versions of entries posted against the director’s loan
account (from Mr. Berget’s former accountants and from his current
accountants)… We have noted inconsistencies in the total amounts of debit and
credit entries between the two reports.
4.
….The 1997
T4A slip prepared by Southland.. reports no tax withheld on Mr. Berget’s
directors’ fees. Secondly, through a review of Collections’ diary, Mr. Berget
is the person who directed that the $1,075,000.00 payments ($700,000.00 of
which were NSF) made by Southland be applied against his personal tax
liability. It is unclear why Southland would have remitted cheques to the
Minister on behalf of Mr. Berget’s personal tax liability if Mr. Berget did not
believe he owed the tax on the 1997 and 1998 Director’s fees.
5.
Mr.
Berget has a long history of non-compliance with the Minister dating back to
his 1985 taxation year. As well as being in arrears for his 1997 and 1998
year….Mr. Berget has current balances outstanding for his 1999, 2001, 2003 and
2004 taxation years…
6.
There is
uncertainty in what the exact balance of the Director’s loan account is at any
point in time due to the fact that supporting documentation cannot be
provided. Therefore, I am unable to accept your position that a credit balance
has always been maintained. Your position that a draw down of the Director’s
loan has not occurred remains unsubstantiated.
[24]
The
November 9, 2005 decision concluded:
“The documentation provided is
insufficient to determine the exact balance of the Director’s loan account at
any point in time. Therefore, I deny your fairness request on the basis that
supporting documentation has not been provided to demonstrate that Mr. Berget
did not receive the bonus income he reported in his 1997 and 1998 taxation
years.”
[25]
The
fairness decision letter then invited the applicant to request a second review
of the decision by the Director of the Edmonton Tax Services office. The
applicant did not request a second review.
The Court’s conclusion
[26]
The
Court has reviewed the five volumes of evidence with respect to the applicant’s
request for a refund of taxes for the 1997 and 1998 tax years. The evidence
establishes that there were hundreds of payments to the applicant from the
Southland loan account over the material time period. The evidence also establishes
that the applicant’s personal tax returns for 1997 and 1998 showed employment
income as “director’s fees” in the amount of $1,106,000.00 and $125,000
respectively. From reviewing the evidence, the Court is satisfied that this
decision was reasonably open to the Fairness Committee Team Leader, Sandra Foy
for the following reasons:
1.
the
ledger entries show hundreds of credits to the Southland loan account in favour
of the applicant over the material time period. These reflect payments from Southland
to the applicant or to companies related to the applicant. For the two taxation
years in question, the payments to the applicant exceed the amount of the
Director’s fees declared as income by the applicant, and deducted as an expense
by Southland for those years;
2.
the
evidence is that the applicant declared this income on his personal tax returns
and paid taxes on these amounts. The applicant would not declare $1.1 million
as income from director’s fees and pay taxes on this income unless he believed
he received this income in some form; and
3.
the
evidence is that Coopers Lybrand, a highly respected national accounting firm,
prepared the financial statements for Southland, prepared the tax returns for
Southland, and prepared the personal tax returns for the applicant. These
returns and financial statements were prepared contemporaneously with the
events that happened during those time periods. The work done by the current
accountants is after the fact and is revisionist. If Coopers Lybrand was, incorrect,
negligent or incompetent in preparing these financial statements and income tax
returns, then Coopers Lybrand should have been held accountable. There is no
evidence that Coopers Lybrand was negligent or wrong in preparing these financial
statements and tax returns, or was confronted and held accountable by the
applicant or the applicant’s new accountants for these personal tax returns
which erroneously declared $1.1 million and $125,000 as income in 1997 and 1998
respectively.
[27]
In
Gagné v. The Attorney General of Canada, 2006 FC1523 where Mr. Justice
Michel Beaudry, on a similar application for judicial review from a decision
under subsection 152(4.2) of the Act, held at paragraph 24:
“In my view, it was entirely reasonable
for the taxation authorities to deny the applicants’ request in the absence of
relevant supporting documentation that would have clearly distinguished the
applicants’ personal expenses from his employment expenses and from expenses
claimed from the business…”
[28]
In
this case I am satisfied that the tax officer preparing a report for the
Fairness Committee worked with concentration, dedicated effort and in a
thorough manner to resolve the problem from February 10, 2004 (when the
fairness request was submitted) until the decision was made on November 9,
2005. The hard work is evidenced in the 1,378 pages before the Fairness
Committee, now before the Court. These pages contain detailed and complex
information. There is difficulty reconciling the conclusions of the former
accountants with the new accountants. There were countless meetings between the
tax officer and the lawyers for the applicant. The tax officer asked detailed
questions time and time again setting out concerns which were not satisfied.
[29]
Southland
had sales for the relevant tax years in excess of $7 million in 1996,
$11 million in 1997 and $13 million in
1998. This money flowed in and out of many accounts including to the applicant.
While the applicant may be sincere, honest, hardworking and a genius in real
estate development, the accounting of the revenue, expenses, fees and other
transfers between himself personally and his related companies was not clear
and made the reconciliation of his contentions with the tax records impossible.
[30]
Accordingly,
the Court finds reasonable the Fairness Committee decision that the evidence fails
to establish that the applicant did not receive the director’s fees from
Southland in 1997 and 1998. The applicant has the onus of proving his case,
which he could not do even though the tax officer Ms. Solo gave the applicant’s
counsel repeated opportunities.
Apprehension of Bias
[31]
In
this case the respondent carefully and thoroughly considered the fairness
request for a refund after the three year time limit.
[32]
In
applying the duty to act fairly under subsection 152(4.2) neither Parliament
nor the Minister have established an independent tribunal or independent person
to consider applications for refunds after the normal deadline under the Income
Tax Act has expired for reassessments. Accordingly, the person at the tax
department familiar with a particular subject matter or particular file can be
expected to be the resource person on such an application. The fact that the official
is familiar with the file and has made decisions on related matters does not
mean that that person is biased. That person is informed. The Court rejects the
applicant’s submission that the tax officer, Ms. Solo, who worked on this case,
breached the duty of fairness because of bias or a reasonable apprehension of
bias since she was familiar with the file and had made related decisions.
[33]
Ms.
Solo, the tax officer familiar with the complex file, prepared a report for the
Fairness Committee. The Fairness Committee decided the case on November 9,
2005. The Fairness Committee is independent of the appeals officer. In any
event, the Fairness Committee invited the applicant to further appeal to the
independent “second level of review”, which the applicant did not do. The
applicant has no grounds to claim bias since he did not exercise his right to
an independent review.
[34]
Subsection
152(4.2) of the Act is a fairness provision in that the Minister must consider
a request for a refund after the three year deadline. It does not require that
the respondent assign a new person unfamiliar with the complex file to prepare
background information and a recommendation for the “fairness committee”.
[35]
Moreover,
the applicant waived his right to argue bias by not objecting at the outset in
2004 when he realized Ms. Solo would be the tax officer working on the request.
[36]
For
the foregoing reasons, the Court must dismiss this application for judicial
review. There will be no order as to costs.
JUDGMENT
THIS COURT
ORDERS AND ADJUDGES that:
This
application for judicial review is dismissed.
“Michael A. Kelen”
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