Date:
20130214
Dockets: T-402-11
T-403-11
Citation: 2013
FC 157
Ottawa, Ontario,
February 14, 2013
PRESENT: The
Honourable Mr. Justice Boivin
BETWEEN:
|
GIUSEPPE AMOROSO
ANGELINA PERROTTI-AMOROSO
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Applicants
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and
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ATTORNEY GENERAL OF CANADA
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Respondent
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REASONS FOR
JUDGMENT AND JUDGMENT
[1]
The
applicants seek judicial review pursuant to section 18.1 of the Federal
Courts Act, RSC 1985, c F-7, of a decision of the Canada Revenue Agency
(the CRA) dated February 3, 2011, in which the CRA partially denied relief to
cancel interests under the taxpayer relief provisions of the Income Tax Act,
RSC, 1985, c 1 (5th Supp) [the Act]. The applicants sought cancellation of all
interests accumulated for taxes owed for years 1989, 1990 and 1992. The CRA
cancelled interests for the period between January 1, 2009 and January 5, 2011,
but refused to cancel interests for the years prior to 2009.
[2]
The
proceedings in file T-402-11 (Mr. Giuseppe Amoroso) and file T-403-11 (Mrs.
Angelina Perrotti-Amoroso) have been consolidated by Order of this Court on
July 28, 2011.
Factual
Background
[3]
Mr.
Giuseppe Amoroso and Mrs. Angelina Perrotti-Amoroso (the applicants) invested
in a Research and Development project in 1992, called Biosystems 2. Before
investing in Biosystems 2, the applicants allegedly visited the premises and
called the CRA to obtain information on the project. As a result of this
investment, the applicants were reassessed on March 15, 1996, for the 1989,
1990 and 1992 tax years. This reassessment was the result of an audit carried
out by the CRA of several tax shelters that operated under a Research and
Development scheme. The applicants, along with thousands of taxpayers, were
affected by this audit (Respondent’s Record, Affidavit of Jean Laporte, pp 2
and 250).
[4]
The
scheme operated by having taxpayers invest an amount of money in a Research and
Development project, following which they would receive half of their
investment back in money or see their “loan” erased. This resulted in the
actual investment in the project being only 50% of the declared investment. The
taxpayers would then claim a business loss or an investment tax credit which
were substantially higher than the amount actually invested in the project
(Respondent’s Record, Affidavit of Jean Laporte, pp 2 and 250). The taxpayers
would receive a substantial tax refund, varying from 135% to 140% of the
invested amount (Application Record, p 41).
[5]
The
CRA’s audit proceeded in different stages, the second stage concerning a group
known as the “Groupe principal”. This audit was conducted from 1991 until 1995,
covered tax years from 1989 until 1993 and affected over 12,000 individuals and
176 corporations. The applicants were part of this “Groupe principal”
(Respondent’s Record, Affidavit of Jean Laporte, pp 3 and 251).
[6]
Given
the high number of taxpayers involved in the scheme, the CRA chose to offer a
global solution to the taxpayers. A document entitled “Projet de Règlement”,
dated June 30, 1995, was sent to all the taxpayers from the “Groupe principal”
who were affected by the audit on Research and Development tax shelters
(Respondent’s Record, Affidavit of Jean Laporte, pp 3 and 251; Exhibit R-3, pp
29-52 and 276-99). The settlement offer was meant as a global solution which
applied only to taxation years from 1989 to 1993. The initial settlement
proposed on June 30, 1995, cancelled interests until October 31, 1995 and had
to be accepted before September 30, 1995. The offer’s deadline was extended
until February 28, 1997, and offered to cancel interests from May 1st of the
year when the taxes were owed until the reassessments, or until December 29,
1995, for the taxpayers who signed the offer after December 30, 1995. In
exchange, the taxpayers would see their investment tax credit and business loss
disallowed, and would waive their right to objection and appeal in this
respect.
[7]
In
response to the settlement offer, a defence fund was set up in August 1995 and
recommended that investors refuse the settlement offer and oppose their notices
of reassessment before the Tax Court of Canada. The investors who joined would
be represented by Me Jean-Maurice Gagné (Respondent’s Record,
Exhibit R-4, pp 53-61 and 300-08). The CRA never received a signed copy of the
settlement offer from the applicants (Respondent’s Record, Affidavit of Jean
Laporte, pp 3 and 251).
[8]
Since
the CRA did not receive the signed settlement offer from the applicants, their
files remained pending until they were reassessed on March 15, 1996. Mr.
Amoroso was reassessed as follows: i) for the tax year 1989, $5,918.78 in
income tax and $1,561.83 in interest charges; ii) for the tax year 1990,
$2,090.83 in income tax and $551.72 in interest charges; and iii) for the tax
year 1992, $6,380.46 in income tax and $1,762.95 in interest charges
(Respondent’s Record, Affidavit of Jean Laporte, pp 3-4). Ms. Amoroso was also
reassessed as follows: i) for the tax year 1989, $2,234.14 in income tax and
$471.31 in interest charges; ii) for the tax year 1990, $6,506.49 in income tax
and $1,372.62 in interest charges; and iii) for the tax year 1992, $15,687.10
in income tax and $4,609.56 in interest charges (Respondent’s Record, Affidavit
of Jean Laporte, p 251).
[9]
When
the applicants filed notices of objection to the 1996 reassessments in June
1996, the CRA informed them that even if the amounts were not immediately due,
interests would continue to accrue.
[10]
On
September 10, 1996 (for Mr. Amoroso) and on February 28, 1997 (for Ms Amoroso),
the applicants’ representative and counsel for the investors’ defence fund, Me
Gagné, appealed directly to the Tax Court of Canada on behalf of the applicants
for the 1992 taxation year only (Respondent’s Record, Affidavit of Jean
Laporte, p 4).
[11]
On
February 28, 1997, the CRA’s settlement offer expired (Respondent’s Record,
Affidavit of Jean Laporte, pp 4 and 252).
[12]
On
March 21, 1997, the CRA and the taxpayers’ lawyers, including Me
Gagné, chose the case of Richard McKeown (the McKeown case) as the test
case for the Research and Development scheme before the Tax Court of Canada
(Respondent’s Record, Affidavit of Jean Laporte, pp 4 and 252). The applicants’
notices of objection for the reassessments of tax years 1989 and 1990 were
suspended until the resolution of the McKeown test case.
[13]
After
thirty-three (33) days of hearings in 1998 and 1999, the Tax Court of Canada
rendered its judgment in the McKeown case on March 12, 2001. The Court’s
judgment was not favourable to the involved taxpayers (McKeown v Canada, [2001] 4 CTC 2197, [2001] ACI no 236 (QL) [McKeown]).
[14]
On
February 7, 2003, the applicants were sent a letter informing them that they
could ask for a taxpayer relief if they were unable to pay, and that interests
could only be cancelled if the amount payable was definitive. Following the outcome
of the McKeown judgment, the CRA confirmed the male applicant’s
reassessments for the years 1989 and 1990 on November 7, 2003, and the female
applicant’s were confirmed on May 10, 2004. The male applicant filed a notice
of appeal to the Tax Court of Canada for the 1989 and 1990 reassessments on
August 13, 2004, and the female applicant on June 23, 2004 (Respondent’s
Record, Affidavit of Jean Laporte, pp 5 and 252).
[15]
On
December 23, 2004, the applicants submitted a first request for relief which
they themselves indicated was incomplete (Respondents’ Record, Affidavit of
Jean Laporte, Exhibit R-7, pp 140-42 and 393-95). The applicants requested that
CRA waive the interest charges owed, but also that it wait for their request to
be complete before making a decision. The CRA responded by letter dated June
22, 2005, indicating that they would gather the necessary information to
examine the file, but needed the taxation years for which relief was being
requested before they could proceed (Respondents’ Record, Affidavit of Jean
Laporte, Exhibit R-8, pp 143-45 and 396-98). The response letter also reminded
the applicants that interests would continue to accrue even though a request
for relief had been made. According to the respondent, the CRA never received an
answer from the applicants to the June 22, 2005 letter. According to the
applicants, they never received the June 22, 2005 letter.
[16]
On
October 1, 2007, Me Daniel Bourgeois wrote to the CRA about several
taxpayers, including the applicants, asking for relief in the form of
cancellation of interests, invoking information circular IC07-1, dated May 31,
2007, and its paragraphs 35 and 36 regarding third party actions. According to
the letter, the taxpayers received unsound advice not to accept the 1995 settlement
offer from their representative at the time, Me Gagné. The taxpayers
now wished to avail themselves of the terms and conditions of the 1995
settlement offer (Respondents’ Record, Vol 1, p 148 and Vol 2, p 401). On
October 29, 2007, Mr. Jean Laporte, Litigation Manager at the Montréal Tax
Services Office, responded to Me Daniel Bourgeois and indicated that
the settlement offer was only valid from June 30, 1995 until February 28, 1997,
and that the CRA did not intend to reintroduce the said offer. Mr. Laporte also
indicated that the taxpayer relief is a last resort to which taxpayers cannot
turn as long as other judicial recourses are being exercised (Respondents’
Record, Affidavit of Jean Laporte, Vol 1, pp 150-52; Vol 2, p 403-05).
[17]
On
January 17, 2008, the applicants abandoned their appeals at the Tax Court of
Canada for the taxation years 1989, 1990 and 1992.
[18]
In
a letter dated January 18, 2008, the CRA followed up on a meeting which took
place on November 6, 2007 with the applicants. The letter confirmed that the
applicants’ appeals at the Tax Court of Canada had been withdrawn, and
indicated that they could communicate with Mrs. Francine Perreault of the CRA
if they still wished to request a review of their file under taxpayer relief
provisions of the ITA (Material from Tribunal filed in T-402-11, Tab 4).
[19]
The
male applicant’s file for the relevant taxation years is summarized as follows
(Respondents’ Record, Vol 1, p 198):
Year
|
Initial
Assess
ment
|
Reassess
ment
|
Objec
tion
|
Confirma
tion
|
Notice
of Appeal
|
Disconti
nued
|
Interests
on 13-10-2010
|
1989
|
07-10-1991
|
15-03-1996
|
YES
|
07-11-2003
|
13-08-2004
|
17-01-2008
|
$15,546
.31
|
1990
|
28-08-1992
|
15-03-1996
|
YES
|
07-11-2003
|
13-08-2004
|
17-01-2008
|
$6,728.09
|
1992
|
16-06-1993
|
15-03-1996
|
YES
|
N/A
|
10-09-1996
|
17-01-2008
|
$18,923
.55
|
[20]
The
female applicant’s file for the relevant taxation years is summarized in the
following table (Respondents’ Record, Vol 2, p 452):
Year
|
Initial
Assess
ment
|
Reassess
ment
|
Objec
tion
|
Confirma
tion
|
Notice
of Appeal
|
Disconti
nued
|
Interests
on 13-10-2010
|
1989
|
03-06-1991
|
15-03-1996
|
YES
|
10-05-2004
|
23-06-2004
|
17-01-2008
|
$5,554.72
|
1990
|
25-09-1992
|
15-03-1996
|
YES
|
10-05-2004
|
23-06-2004
|
17-01-2008
|
$17,649
.94
|
1992
|
07-06-1993
|
15-03-1996
|
YES
|
N/A
|
28-02-1997
|
17-01-2008
|
$52,825
.89
|
[21]
On
March 22, 2008, the applicants submitted a request for taxpayer relief for the
years 1989, 1990 and 1992. They requested cancellation of interests, and
indicated the reasons as being CRA error, CRA delay, financial hardship and
inability to pay, as well as other circumstances set out in their documentation
(Respondent’s Record, Affidavit of Jean Laporte, Exhibit R-11, pp 155 and 408).
In the Taxpayer Relief Provisions Reports signed May 12, 2008 (for the male
applicant) and June 5, 2008 (for the female applicant), the CRA reported the
total amount owed by the male applicant, including interests, to be over
$48,000, whereas he offered to pay an amount equivalent to what was required by
the settlement offer in 1995, namely, over $10,000. The total amount owed by the
female applicant was, at that time, over $84,000, and she proposed a final
amount of over $16,000 in settlement, as was offered in the 1995 settlement
(Respondent’s Record, pp 158-61 and 411-14). An examination of the applicants’
files revealed a monthly deficit, but higher assets than liabilities resulting
in a surplus of almost $250,000. The CRA concluded in these reports that the
applicants were not in a situation of financial hardship.
[22]
The
applicants’ first-level taxpayer relief request was prepared by Mrs. Francine
Perreault and was denied by letter sent on June 20, 2008 (Respondent’s Record,
Affidavit of Jean Laporte, Exhibits R-13 and R-14, pp 162-79 and 415-33). The
CRA analysed the delays in the applicants’ case and concluded that the
reassessments were done within the prescribed delay. Given the amount of
taxpayers involved in audits for Research and Development programs (over
10,000), audits were ongoing from 1992 until 1995, resulting in a settlement
offer to taxpayers in June 1995. The CRA concluded that it could not be
responsible for the applicants’ decision, informed by their legal
representative at the time, to reject the settlement offer, and that CRA
officials did not act without diligence when reassessing the applicants.
[23]
When
analyzing the delays with the notices of objection and at the Tax Court of
Canada, the CRA noted that the applicants’ representative, along with the
Minister of Justice, agreed to wait for the resolution of the McKeown
case, which occurred in March 2001. The CRA noted that despite the McKeown
case being decided in a manner which did not favour the applicants, they
persisted with judicial procedures and delayed paying their debt. The
reassessments for the years 1989 and 1990 were confirmed in November 2003 for
the male applicant, and May 2004 for the female applicant. The CRA, in its
analysis of the delay between the McKeown judgment and the confirmation
of the applicants’ reassessments, noted that there was a 30-day period for an
appeal of the judgment, as well as a moratorium required from the Department of
Justice from May 1, 2001, until November 30, 2001, because of the large number
of appeals already before the Tax Court of Canada. While the CRA concedes in
its analysis that there is no specific reason for the delay as of December
2001, given the sheer number of files involved in the Research and Development
projects, confirmation of reassessments could not be achieved without a certain
processing delay.
[24]
The
CRA further noted that once the applicants appealed their reassessments to the
Tax Court of Canada, the CRA had no control over delays. The CRA cited Madam
Justice Lamarre-Proulx’s words in Lassonde v Her Majesty the Queen, 2003
TCC 715 at paras 141 and 158, 2003 DTC 1289 [Lassonde]:
[141] … Une fois les procédures devant
cette Cour entamées, il appartient à l'appelant de promouvoir l'audience de sa
cause.
[141] … Once proceedings have begun before this
Court, it is the responsibility of the Appellant to request that the case be
heard.
[158] Il est possible pour un
contribuable de demander à notre Cour d'inscrire son appel pour audition une
fois que la Réponse a été produite. En fait, dans une procédure judiciaire qui
est un appel, c'est à l'appelant de la promouvoir.
[158] It is possible for a taxpayer to ask this
Court to enter an appeal for hearing once the Response is filed. In fact, in an
appeal litigation, it is the responsibility of the appellant to request the
hearing.
The CRA also noted that at
paragraph 142 of the Lassonde judgment, which also dealt with Research
and Development investments, the Tax Court concluded that there was no lack in
diligence on the part of the Minister of National Revenue’s agents with regards
to processing assessments. According to the CRA, the applicants chose to wait for
the outcome of the Lassonde case at the Federal Court of Appeal, which
was issued in 2005 and was not in their favour (Lassonde v Canada, 2005
FCA 323, [2005] FCJ No 1682 (QL)).
[25]
The
CRA agreed that the delays were lengthy in this case, but held that it acted
with due diligence. With regards to the applicants’ argument that the delays
diminished their chances of success, the CRA noted that no taxpayers involved
in the Research and Development scheme were successful in their legal
proceedings, an outcome known since the 2001 McKeown case. The CRA also
remarked that the applicants in this case benefited from important income tax
refunds when they invested in the Biosystems 2 project, and that they have had
the exclusive enjoyment of these amounts of money. The CRA also noted that
while it is true that the government encouraged investing in Research and
Development, it did not encourage participation in the scheme in which the
applicants invested. According to the CRA, the applicants should have known
that the investment scheme was “too good to be true”. The CRA noted that the
fact that they issued a tax shelter number is only an administrative formality,
and not a guarantee of the legitimacy of the tax shelter.
[26]
The
CRA recognized that the applicants’ good faith and integrity were not
challenged and that they had produced their income tax returns and paid their
taxes in the past.
[27]
With
regards to the 1995 settlement offer, the CRA held that it was meant to be a
global and final solution, which required that taxpayers waive their rights to
appeal. The CRA noted that by appealing to the Tax Court of Canada, the
applicants clearly refused the settlement offer which cannot now be applied in
the context of a taxpayer relief.
[28]
The
CRA held that the applicants did not act with diligence because they did not
undertake the necessary steps to minimize the interests that were accumulating
and they invested in a dubious scheme. The CRA examined the applicants’ assets
and concluded that although they were faced with an important monthly deficit,
the value of their assets was sufficient to show that they were not in
financial hardship and that their inability to pay was due to factors on which
they had control. The CRA also noted that the applicants were in the process of
building a medical clinic, the cost of which was approximately six (6) million
dollars.
[29]
The
CRA also referred to the case of Moledina v Canada, 2007 TCC 354 at para
31, [2008] TCJ No 286 [Moledina], where the Tax Court of Canada stated
the following when discussing the same 1995 settlement offer:
[31] … Nonetheless, I do not think I can grant the
appellant the relief he seeks. Quite apart from the question of jurisdiction, I
have to ask who is responsible for the delay. Certainly no fault can be
attributed to the Department of National Revenue. Its response to the problem
was swift, decisive and responsible. It made a fair and generous offer to
settle and even extended the time for acceptance. I can find no basis for
criticizing the government’s behaviour and even if delay were a legal basis for
granting the relief sought by the appellant, I can see no grounds for laying
that delay at the feet of the government. The Minister delayed confirmation of
the assessments in an attempt to resolve the thousands of objections filed in
connection with the SRED tax shelters. It was open to any taxpayer to institute
an appeal in this court 90 days after filing a notice of objection. Once a case
is in this court the practice of the Registry is to accommodate any appellant who
wishes to move a case at flank speed. If the parties want a trial date they can
have one within a month. …
[30]
The
first level recommendation was that interests should not be cancelled because
they did not result from extraordinary circumstances outside of the applicants’
control, or from actions attributable to the CRA. This recommendation was
confirmed by letter sent to the applicants on June 20, 2008 (Respondent’s
Record, Affidavit of Jean Laporte, Exhibits R-13 and R-14, pp 162-78 and
415-33).
[31]
The
applicants requested a re-examination of their files on August 8, 2008
(Respondent’s Record, Affidavit of Jean Laporte, Exhibit R-15, pp 180-84 and
434-37). In their request, the applicants stated that they could not have paid
the amounts owed in 1996 because their financial situation would not have
allowed them to do so. According to the applicants, they were told by their
legal advisor, Me Gagné, that the individuals who settled with the
1995 offer had other issues to hide, and that their situation was different.
They further stated that they signed the settlement offer with instructions to
their legal representative to verify its legitimacy, and to forward the signed
offer to the CRA if it was found to be legitimate. According to the applicants,
their legal representative may have sent the signed offer, which may have been
lost by CRA. The applicants also claimed to have contacted the CRA several
times between 1995 and 1996, but were told to pay and appeal, or sign the
settlement.
[32]
The
applicants stated that when they met with CRA officials, they were convinced to
take two (2) actions: 1) to withdraw their appeal at the Tax Court of Canada
and 2) to pursue relief for the interests which, they were allegedly told,
would be likely because of the extraordinary circumstances of this case. The
applicants expressed disagreement with the CRA’s conclusions on their financial
situation at the first level review, and indicated that the six (6) million
dollar medical centre is not their property, is funded by many investors, and
should therefore not be factored in an evaluation of their financial situation.
The applicants expressed their desire to benefit from the 1995 settlement.
According to the applicants’ letter, they have exhausted all their financial
resources to pay the capital of the taxes owed for 1989, 1990 and 1992, and the
only remaining issue is the compounded interest on the said taxes.
[33]
The
applicants also argued in their letter to the CRA that they were misled when
the government did not warn them of the instability of the program. The
applicants referred to a publication entitled the “Taxpayer Bill of Rights”,
which stipulates at item 14 that “You have the right to expect us to warn you
about questionable tax schemes in a timely manner”, and argue that they were
not warned when they inquired in 1992 for the validity of the Biosystems 2
project. The applicants claim that the government questioned itself about the
Research and Development program in 1987, but did not warn them when they
called in 1992 prior to investing.
[34]
Following
the applicants’ request, the CRA engaged in a second level review and rendered
a final decision by letter dated February 3, 2011. This decision is the one
under review in the present application.
Decision under
Review
[35]
A
Taxpayer Relief Provisions Report, dated September 24, 2008, was prepared to
analyze the financial hardship component and was signed on October 28, 2008
(Respondent’s Record, Affidavit of Jean Laporte, Exhibit R-16, pp 185-88 and
438-42). The report concluded that the applicants were not unable to pay all
amounts owing in interests, nor were they in a situation of financial hardship.
The report examined the applicants’ assets and stated that using the
applicants’ RRSPs to reimburse the interests owed would only create a new debt.
However, the equity the applicants have on their home was evaluated at
approximately $532,000. The report indicated that it was difficult to
understand how the applicants could sustain their current lifestyle with a
deficit of nearly $4,000 every month and the applicants’ reported incomes, and
suggested that selling their house for a more modest one would be a way to
remedy the situation. The report also indicated that the CRA received
post-dated cheques on behalf of both the applicants for the capital of taxes
owed (Respondent’s Record, Affidavit of Jean Laporte, Exhibit R-16, pp 186 and
439). The CRA’s Appeals Branch received the report on November 7, 2008
(Respondent’s Record, Affidavit of Jean Laporte, Exhibit R-17, pp 190 and 444).
[36]
The
second review was prepared by Mrs. Françoise Bienvenue and signed on February
3, 2011 (Respondent’s Record, Affidavit of Jean Laporte, Exhibit R-18, pp
191-213 and 445-68). It summarized the history of the Research and Development
project, and explained that audits were carried out in three (3) different
groups, the applicants belonging to the “Groupe Principal”, audited between
November 1991 and March 1996. It explained that a study group was created in
October 1994, following which the Appeals Branch asked that the processing of
Research and Development files that were being audited, and those where
taxpayers objected to a reassessment be suspended. Following the results of the
study group, a settlement offer was sent to investors, both those being audited
and those who had objected to a reassessment, in June 1995. The offer was
reiterated in November 1995. In March 1996, CRA reassessed all taxpayers who
had not accepted the offer and whose reassessments had been pending.
[37]
After
presenting a lengthy history of the Research and Development project in
general, as well as a general explanation of the delays stemming from notices
of objection and procedures at the Tax Court of Canada, the CRA examined the
applicants’ particular circumstances. It identified the motives raised by the
applicants in their August, 2008 request as the following:
a. they have always paid
their taxes without delay;
b. they received
information from their legal representative, Me Gagné, and a report
from the “Protecteur du citoyen”, according to which they were correct and the
reassessments were unfounded;
c. they signed the 1995
offer, gave it to their legal representative, with instructions to verify its
legitimacy and then forward it to the CRA;
d. the excessive delays
in this case have resulted in loss of evidence and diminished chances of
success;
e. they received tax
shelter numbers from both provincial and federal governments;
f. the Biosystems 2
project was serious, had economic potential, and had been operational for
several years;
g. the 1995 settlement
offer should be applicable today because it is wrong for the CRA to decline a
settlement previously offered because the applicants exercised their rights.
[38]
The
CRA began by explaining that relief provisions allow the Minister of National
Revenue to make use of a discretionary power when interests accrued because of
an unjustified delay in processing, for instance. The CRA had to determine
whether the processing time was reasonable and justified in the circumstances.
Referring to the Lassonde case, above at para 132, the CRA noted that:
[132] In
proceedings related to complaints made under administrative law, the
determination of whether a delay is inordinate is not based on the length of
the delay alone, but on contextual factors, including the nature of the case
and its complexity, the purpose and nature of the proceedings, and whether the
respondent contributed to the delay or waived the delay.
[39]
According
to the CRA, given the complexity and amount of files involved, the auditing
process had to be undertaken over the span of several years. The research
corporations had to be audited before investors’ tax benefits could be denied,
and general anti-avoidance rules had to be examined in order to determine
whether they applied. The CRA also explained that scientific advisors who were
involved thought that the projects were interrelated and had to be examined
globally. The CRA also indicated that certain promoters caused delays
themselves. The CRA recognized that some of these delays were not directly linked
to the applicants, but were nonetheless relevant since they chose to invest in
a dubious tax shelter. The CRA concluded that it could not be held responsible
for these delays, and it reassessed the taxpayers in a reasonable delay,
justified in the circumstances. The CRA also said that even if it suspected
that some of the corporations were inadmissible, it could not simply and
automatically disallow all tax benefits for the involved taxpayers without an
in-depth analysis. The CRA emphasized that part of the delay for the 1992
taxation year was due to the CRA’s study, which allowed it to better position
itself and offer a settlement to the taxpayers in 1995.
[40]
The
CRA then analyzed the delays caused by the objections of the taxpayers and at
the Tax Court of Canada. It noted that an assessment is deemed valid pursuant
to paragraph 152(8) of the Act, and therefore due immediately. An objection
merely allows the taxpayer to defer the payment of the amount owed until the
outcome of the case, plus accrued interests should the outcome not be in the
taxpayer’s favour. The CRA recalled that the taxpayers were informed in October
1994 and in March 1995 that their objections would be pending while it examined
the situation to position itself – an internal procedure which is, according to
the CRA, frequent when litigation involves several taxpayers faced with a
similar question. The taxpayers who disagreed with this administrative decision
could appeal to the Tax Court of Canada within 90 days pursuant to paragraph 169(1)(b)
of the Act, which the applicants did. The CRA recalled that in March 1997, the
parties, including the applicants’ representative, agreed to choose the McKeown
case as the test case and to stay the hearings of the other cases until the McKeown
case would be decided. All objections were also deemed to be pending until the
outcome of the McKeown case was known. The CRA noted that the applicants
were warned in February 1999 that the McKeown case might not be decided
until autumn 1999, and yet chose not to act.
[41]
The
second level review also explained the delay between the McKeown
judgment (March 2001) and the confirmation of the taxpayers’ reassessments
(November 2003 and May 2004) in the same manner as the first level review, and
similarly referred to the taxpayers’ obligation to further their own case at
the Tax Court of Canada. On the question of delay, the CRA concluded to a
normal evolution given all the circumstances, and that the taxpayers knowingly
let interests accrue on their owed taxes for this period.
[42]
The
CRA indicated that most investors accepted the settlement offer following
recommendations from almost all taxation specialists. The CRA held that the
applicants chose to pursue their case, following their legal representatives’
advice, and that it cannot be held responsible for recommendations made by a
third party.
[43]
As
in the first level review, the CRA in its second level review noted that while
the government encouraged investing in Research and Development, it did not
encourage the specific tax shelter in which the applicants invested, which was
dubious and appeared too good to be true. The CRA also noted that the
applicants’ good faith was not an issue, nor was their taxation history, which
was otherwise without problems. The CRA also repeated its comments regarding
the 1995 settlement offer, to which the applicants renounced by appealing to
the Tax Court of Canada on September 10, 1996 and February 28, 1997, and which
was a global and final solution that cannot be applied under relief provisions.
[44]
The
CRA held that it is unreasonable for the applicants to further delay the
payment of their debt by requesting relief since they know the exact amount of
the debt owed, they are aware that interests continue to accrue, and the
litigation opposing CRA to the taxpayers in this case is over. According to the
CRA, there are no circumstances outside the applicants’ control that would
justify granting relief, nor has financial hardship been demonstrated in their
case.
[45]
In
this second level review, the CRA summarized a meeting that took place between
the applicants, Mr. Jean Laporte, Manager for the Committee of Taxpayer Relief,
and Mrs. Françoise Bienvenue, Litigation Officer, on December 9, 2010. The CRA
recognized that some delays warrant caution and allowed the cancellation of
twenty-four (24) months of interests for the time elapsed between the receipt
of the Taxpayer Relief Provisions Report, which was received on November 7,
2008 by the Appeals Branch, and the time when the file was reviewed, in early
January 2011. A normal processing time, according to the CRA, would have been
two (2) months, and thus should have been completed by the end of December
2008. Accordingly, interests were cancelled from January 1, 2009, until January
5, 2011.
Relevant
Provisions
[46]
Subsection
220 (3.1) of the Income Tax Act provides for the discretion of the
Minister of Revenue to waive or cancel penalties and interests:
PART XV
ADMINISTRATION AND ENFORCEMENT
Administration
…
Waiver
of penalty or interest
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.
|
PARTIE XV
APPLICATION ET EXÉCUTION
Application
[…]
Renonciation
aux pénalités et aux intérêts
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.
|
[47]
Other
relevant dispositions are presented in Annex to this judgement.
[48]
The
Minister of National Revenue has also created Guidelines to facilitate this
discretionary decision (Taxpayer Relief Guidelines (Part II):
Information Circular IC07-1 (Guidelines)). These Guidelines are not binding and
cannot exclude relevant reasons (Sutherland v Canada (Customs and Revenue
Agency), 2006 FC 154 at para 17, [2006] FCJ No 242 (QL)), but generally
state the following:
Part
II
Guidelines for the Cancellation
or Waiver of Penalties and Interest
…
Circumstances Where Relief From
Penalty and Interest May Be Warranted
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.
|
Partie
II
Lignes
directrices concernant l’annulation ou la renunciation aux pénalités et aux
intérêts
[…]
Situations
dans lesquelles un allègement des
pénalités et
des intérêts peut être justifié
23. Le
ministre peut accorder un allègement de
l’application
des pénalités et des intérêts lorsque les
situations
suivantes sont présentes et qu’elles justifient
l’incapacité
du contribuable à s’acquitter de l’obligation ou
de
l’exigence fiscale en cause :
a)
circonstances exceptionnelles;
b) actions
de l’ARC;
c)
incapacité de payer ou difficultés financières.
24. Le
ministre peut également accorder un allègement même si la situation du
contribuable ne se trouve pas parmi les situations mentionnées au paragraphe
23.
|
Issue
[49]
The
sole issue raised by this application for judicial review is whether the CRA’s
decision to cancel only a portion of the applicants’ interests was reasonable.
Standard of
Review
[50]
The
standard of review to apply to a Minister’s discretionary decision to cancel
interests owed is that of reasonableness (Lalonde v Canada (Revenue Agency),
2010 FC 531 at paras 27-30, [2010] FCJ No 638 (QL); Telfer v Canada (Revenue
Agency), 2009 FCA 23 at para 24, [2009] FCJ No 71 )QL); Jim’s Pizza
(1980) Ltd v Canada (Revenue Agency), 2007 FC 782 at para 3, [2007] FCJ No
1052 (QL) [Jim’s Pizza]). The Minister’s decision to waive or cancel
interests is a discretionary one, and as such this Court must show deference
and be “concerned mostly with the existence of justification, transparency and
intelligibility within the decision-making process” as well as “whether the
decision 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 [Dunsmuir]). As pointed out by
the respondent, the Minister’s discretionary power to cancel interests is an
exceptional relief (Jim’s Pizza, above, at para 13).
Arguments
Applicants’
Arguments
[51]
The
applicants submit that the CRA did not divulge important information about
questionable elements of the Research and Development program, and that they
became aware of this in 2010 during a meeting with CRA officials. The
applicants also submit that the CRA was aware of certain non-eligible Research
and Development projects, but neglected to inform them and simply provided a
tax shelter number when they called to inquire about Biosystems 2.
[52]
According
to the applicants, the CRA withheld information which would have influenced
their decision with regards to the 1995 settlement offer: namely, an expert
report on Biosystems 2 submitted to the CRA in January 1995 (Application
Record, pp 64-98). The applicants claim to have become aware of this report in
2007 during proceedings at the Tax Court of Canada.
[53]
The
applicants submit that the only delays for which they are responsible concern
the rescheduling of court dates in 2007 pending decisions in other similar
files. The applicants also contend that they were incited by the legal
representatives of the CRA to withdraw their appeal at the Tax Court of Canada
as a sign of good faith and that a favourable decision on tax relief was
probable in their case.
[54]
The
applicants also claim that the CRA did not act in an objective manner because
Mr. Jean Laporte was allegedly part of the first level review in their case as
well as the second level review which is the object of this application for
judicial review.
[55]
The
applicants seek cancellation of all interests charged prior to January 1, 2009,
and after January 5, 2011, and seek to avail themselves of the 1995 agreement.
Respondent’s
Arguments
[56]
The
respondent argues that the CRA’s decision was not unreasonable because the
accrual of interest charges is imputable to the applicants and not to the
Minister of National Revenue or his representatives, except for the period
during which relief has already been granted. According to the respondent, no
undue delay is imputable to the CRA, the applicants are not in a situation of
financial hardship, the allegations of mistakes and misinformation against the
CRA are ill-founded, and the allegations of other exceptional circumstances do
not justify the taxpayer’s relief – therefore, the decision is reasonable.
[57]
On
the issue of delay, the respondent maintains that no undue delay is imputable
to CRA, except for the period of January 1, 2009 to January 5, 2011, where
relief has already been granted. The respondent notes that the applicants
appear to acknowledge that the delays were due to the important volume of files
in the Research and Development scheme (Application Record, pp 3 and 7). The
respondent recalls that the audit for the Research and Development scheme had
to be carried out in three (3) stages, the one (1) concerning the applicants
from 1991 to 1995. According to the respondent, this delay is not inordinate and
culminated with a settlement offer cancelling interest charges for the taxpayers
who accepted it. The respondent further submits that the CRA reassessed the tax
years 1989, 1990 and 1992 within the reassessment period, as is required by
subsection 152(4) of the Act. According to the respondent, the large scale and
complexity of the audit explain why the reassessment occurred just before the
end of the normal reassessment period (citing Adm c L’Agence du revenu du Canada (17 November 2010), Montreal, T-352-10 (FC) at p 3).
[58]
The
respondent maintains that the applicants could not benefit from the terms and
conditions of the 1995 settlement offer today, since the CRA never received a
signed copy of the settlement offer from the applicants and its February 28,
1997 deadline for acc/eptance is long past (citing Article 1392 CCQ).
[59]
The
respondent notes that the applicants chose to oppose the reassessments of the
tax years 1989, 1990 and 1992, without paying the balance owing, knowing that
the interest charges would accrue until a final decision was made on the
oppositions. The respondent also argues that the applicants knew as early as
July 1996 that the resolution of their oppositions might take time, since the
CRA informed them that processing was suspended until the judgment in the McKeown
case. The respondent notes that after the McKeown judgment was issued in
2001, in favour of the Minister of National Revenue, the applicants continued
with their objection without paying the owing balance.
[60]
The
respondent argues that the CRA had no control over any delays that may have
occurred at the Tax Court of Canada. The respondent notes that the applicants
chose to wait for the resolution of their file instead of paying the balance
owing, until they abandoned their appeals in January 2008.
[61]
Lastly,
on the issue of delay, the respondent argues that the only delay imputable to
the CRA in the applicants’ requests for taxpayer relief was the delay of
twenty-four (24) months before a decision was rendered in their second level
review – a delay for which interests were indeed cancelled. According to the
respondent, the applicants knew or ought to have known, when they submitted
their first request for relief in December 2004, that they had to wait for the
resolution of their appeal and oppositions before the CRA could review their
files, that the McKeown judgment was favourable to the CRA, and that the
CRA would not review their files as long as the request for relief was
incomplete, as the applicants themselves requested.
[62]
With
regards to the issue of financial hardship, the respondent recalls that the
applicants have not established that they were in a situation of financial
hardship since their assets exceed their liabilities, resulting in a surplus
that could cover their debt. The respondent also argues that the applicants
failed to mitigate the amount they owe to the CRA by not paying the owing
balance since their March 15, 1996 reassessment. The respondent does note that
between September 15, 2008 and April 15, 2009, the applicants have made monthly
payments for a total of over $12,000 for the male applicant and over $25,000
for the female applicant.
[63]
The
respondent argues that the allegations of mistake and misinformation from the
CRA are ill-founded. The respondent recalls that the audit of most of the
Research and Development projects, including Biosystems 2, was completed in
1995. It would therefore be unreasonable to expect the CRA to confirm the
validity of the Biosystems 2 project in 1992, when the applicants allegedly
inquired about the project. The respondent also recalls that the fact that tax
shelter identification numbers are issued does not certify that a given project
is safe, but is merely an administrative formality. The respondent also notes
that the settlement offer sent to the applicants in 1995 contained a detailed
document outlining the problems arising out of the Research and Development
scheme.
[64]
The
respondent claims that the other exceptional circumstances do not justify
relief, such as: i) the delays making it impossible for the applicants to
submit the best evidence to support their claim; ii) the CRA lawyers swaying
them to withdraw their appeals at the Tax Court of Canada; and iii) the CRA
lawyers convincing them that a positive outcome of a request for relief would
be likely. The respondent states that the CRA has acknowledged the delay in
this case, but that it acted with due diligence given the large scale of the
case. It also adds that none of the taxpayers involved in the Research and
Development scheme have successfully appealed their reassessments in Court
since the McKeown case. The respondent also filed the affidavit of Me
Simon Petit who affirms that at no time did any person present at the November
6, 2007 meeting suggest or acknowledge that the applicants could expect a more
favourable outcome with a fairness request if the appeals were discontinued
(Respondent’s Record, Affidavit of Simon Petit, Vol 1, pp 215-17).
[65]
The
respondent also takes issue with the applicants raising matters in their
application for judicial review which were not previously raised in the request
for relief. Specifically, the applicants claim in their affidavits that the CRA
misled them by not including with the 1995 settlement offer an expert report
about Biosystems 2, issued on January 27, 1995. They claim that this omission
precluded them from making an intelligent decision in respect of the said
offer, and that this report was made known to them only during proceedings
before the Tax Court of Canada. The respondent claims that this issue was never
raised, neither in the first nor second requests for relief, and as such, the
CRA cannot be expected to consider facts that are not brought to its attention.
In any event, the respondent submits that this report is irrelevant to the fact
that the applicants chose to let the interest charges accrue and wait for a
resolution to their appeals.
[66]
The
respondent rejects the applicants’ claims that the CRA did not act objectively
because Mr. Jean Laporte would have been part of both the first and second
review of their requests. The respondent claims that Mr. Laporte never took
part in the first review, but merely replied to Me
Bourgeois in October 2007 after the latter had inquired about reopening the
terms and conditions of the 1995 offer for the applicants, and was solely
acting in his capacity of Litigation Manager for the CRA. According to the
respondent, the first review did not start until March 2008; therefore, it
would be unreasonable to conclude that Mr. Laporte took part in the first
review by writing a letter in October 2007.
Analysis
[67]
The
Court finds that the CRA’s decision was reasonable. The Court recalls that the
Minister of National Revenue’s decision to cancel interests is a discretionary
one, warranting much deference. The Court’s review is limited to the manner in
which the Minister’s discretion was exercised (Sutherland, above at para
20,). To this effect, the Court also recalls the following excerpt from Jenkins
v Canada (Revenue Agency), 2007 FC 295 at para 13, [2007] FCJ No 415 (QL):
[13] In reviewing the decision in this case, it is
important to keep in mind that the power of the Minister, as set out in
subsection 220(3.1) of the Act, is a discretionary power and as such, there is
no obligation on the part of the Minister to reach any given conclusion.
Furthermore, the liability of a taxpayer to pay penalties and interests for the
late filing of income tax returns results from the application of the Act
itself, not from any discretionary decision of the Minister to impose such
penalties and interests. Therefore, the discretionary power of the Minister is
limited to providing exceptional relief from the operation of the Act, where
the Minister believes such relief to be warranted.
[68]
Although
the delays in this case were lengthy, the applicants failed to convinced the
Court that such delays are imputable to the CRA (other than the twenty-four
(24) month period for which relief was granted), nor that exceptional
circumstances arose which the CRA would have neglected to address in its first
and second level reviews of the applicants’ requests. The Court also notes that
the applicants were at all times aware that interests continued to accrue on
their debt, and knowingly chose to defer payment of the owed amounts. According
to paragraph 33 of the Guidelines, such is a factor which can be considered
when arriving at a decision:
Factors Used in Arriving at the
Decision
33.Where
circumstances beyond a taxpayer’s control, actions of the CRA, or inability
to pay or financial hardship has prevented the taxpayer from complying with
the Act, the following factors will be considered when determining whether or
not the CRA will cancel or waive penalties and interest:
(a)
whether or not the taxpayer has a history of compliance with tax obligations;
(b)
whether or not the taxpayer has knowingly allowed a balance to exist on
which arrears interest has accrued;
(c)
whether or not the taxpayer has exercised a reasonable amount of care and has
not been negligent or careless in conducting their affairs under the
self-assessment system; and
(d)
whether or not the taxpayer has acted quickly to remedy any delay or
omission.
[Emphasis
added]
|
Facteurs
utilisés pour arriver à la décision
33. Lorsque
des circonstances indépendantes de la volonté du contribuable, des actions de
l’ARC, ou l’incapacité de payer ou les difficultés financières ont empêché le
contribuable de respecter la Loi, les facteurs suivants seront considérés
pour déterminer si l’ARC annulera ou renoncera aux pénalités et aux intérêts,
ou non :
a) le
contribuable a respecté, par le passé, ses obligations fiscales;
b) le
contribuable a, en connaissance de cause, laissé subsister un solde en
souffrance qui a engendré des intérêts sur arriérés;
c) le
contribuable a fait des efforts raisonnables et n’a pas été négligent dans la
conduite de ses affaires en vertu du régime d’autocotisation;
d) le
contribuable a agi avec diligence pour remédier à tout
retard ou à toute omission.
[Je souligne]
|
[69]
It
was open to the CRA to conclude that the delays of this case did not warrant
cancellation of the interests. The Court finds that the issue of delay was
properly and adequately addressed in the CRA’s decision. Furthermore, the Court
notes, as the respondent submitted, that delays were examined in Moledina,
above, which concerned the same Research and Development scheme audit as the
one which affected the applicants. The Tax Court of Canada held that the CRA
acted quickly, thoroughly and fairly when it presented the settlement offer to
the taxpayers and that no fault could be attributed to the CRA in its response
to the problem. While these comments referred to a different case and were made
in the context of an appeal from reassessments, they are, nonetheless, relevant
in establishing that the CRA acted with due diligence in its general approach
to the Research and Development “unfortunate saga” (Moledina, above at
para 8).
[70]
The
Court is also not convinced that the CRA misled the applicants. The delivery of
a tax shelter number does not amount to an acceptance by the CRA of the
legitimacy of an investment, giving investors a right to a deduction of losses
claimed and investment tax credits for that investment. Instead, a tax shelter
number is
an administrative requirement to the deduction of certain losses and expenses
associated with a tax shelter (Moledina, above at para 9).
Thus, when the applicants called the CRA in 1992 and obtained tax shelter
numbers, the CRA was not in any way guaranteeing the legitimacy of the
investment. The Court finds that this was adequately explained in both first
and second level reviews of the applicants’ relief requests.
[71]
The
Court also finds that the CRA’s decision on the issue of the 1995 settlement
offer is reasonable. The applicants were aware of the existence of the
settlement offer and its conditions. The evidence before this Court shows that
the applicants either chose not to accept it following the advice of their
legal representative, or signed the settlement offer and instructed their legal
representative to verify its legitimacy before sending it to CRA. In any event,
the applicants clearly refused the settlement offer when they chose to appeal
their reassessments at the Tax Court of Canada. The applicants cannot now claim
to be entitled to an offer that expired in 1997, and which they clearly
declined by not respecting one of the conditions – namely, waiving their rights
of appeal. While the Court sympathizes with the applicants, the fact remains
that the applicants continued to defer the payment of the taxes owed for
several years, knowing that interests would continue to accrue.
[72]
The
Court finds that the CRA’s findings on financial hardship were also reasonable.
While it may have been erroneous to rely on the fact that the applicants were
involved in the building of a six million dollar medical clinic in the first
level review, this factor was not part of the financial hardship assessment
carried out for the second level review (Respondent’s Record, Affidavit of Jean
Laporte, Exhibit R-16, pp 185-89 and 438-42). Based on the record, it was
reasonable for the CRA to conclude that since the applicants’ assets exceed
their liabilities in an amount sufficient to cover the remaining debt, the
applicants had failed to show financial hardship.
[73]
Contrary
to the applicants’ submissions, the Court finds no issue with the involvement
of Mr. Laporte in the present case. Mr. Laporte indicated in his sworn
affidavit that he was in no way involved in the first revision the applicants’
taxpayer relief request (Respondent’s Record, Affidavit of Jean Laporte,
paragraph 5, pp 2 and 250). Mr. Jean Laporte rendered the final decision in the
applicants’ second level review, which had been prepared by CRA Officer, Mrs.
Françoise Bienvenue (Respondent’s Record, Affidavit of Jean Laporte, Exhibit
R-1, pp 12 and 259; Exhibit R-18, pp 212 and 466). On the other hand, the first
level review was signed by Mr. James Thompson (Exhibit R-14, pp 179 and 432)
and prepared by CRA Officer, Mrs. Francine Perreault (Exhibit R-13, pp 176
and 429). The Court finds the applicants’ argument that the CRA did not act
objectively because Mr. Laporte was involved in both the first and second level
reviews to be without merit.
[74]
The
Court agrees with the respondent’s submissions according to which the
applicants cannot, at the judicial review stage, raise the matter of the
Biosystems 2 expert report not being included with the settlement offer: this
concern was not raised with the CRA when requesting the taxpayer relief. As a
general principle, the CRA cannot be expected to comment on elements of the
case which were not brought to its attention (Rosenberg Estate v Canada (Minister of National Revenue), 2011 FC 445 at para 42, [2011] FCJ No 564 (QL)).
Additionally, the Court observes that the 1995 settlement offer was accompanied
by a detailed document outlining the problems with Research and Development
projects which would have been sufficient to allow the applicants to evaluate
the legitimacy of their tax shelter investment.
[75]
The
applicants have not convinced the Court that the CRA’s decision was
unreasonable. The exceptional circumstances of this file (its size, complexity
and ensuing delays) were considered and thoroughly explained in the second
level review of the applicants’ request for relief. It was certainly open to
the CRA to decide not to cancel all interests, but to cancel only the interests
accrued during the twenty-four (24) month period during which the delay was
imputable to the CRA. The CRA adequately considered the arguments put forth by
the applicants in their requests for relief, and the Court is satisfied that
its decision was adequately justified, transparent and intelligible (Dunsmuir,
above; Nurses’ Union v Newfoundland and Labrador, 2011 SCC 62, [2011] 3
SCR 708).
[76]
Based
on the foregoing analysis, the application for judicial review will be
dismissed. Notwithstanding the request on behalf of the respondent for costs
against the applicants, the Court exercises its discretion in that regard to
decline to provide any order as to costs.
JUDGMENT
THIS
COURT’S JUDGMENT is that the application for judicial review is
dismissed. Without costs.
“Richard Boivin”