[1] This is an appeal of a judgment of the Federal Court, reported as Lanno v. Canada (Customs and Revenue Agency), 2004 D.T.C. 6537 (F.C.), dismissing an application for judicial review of a decision of a tax official, as set out in a letter dated November 4, 2003, not to exercise his discretion under subsection 152(4.2) of the Income Tax Act, R.S.C. 1985, c. 1 (5^th supp.), to permit the reassessment of Mr. Lanno's 1993, 1994 and 1995 taxation years beyond the normal reassessment period so that he would receive a refund for those years.

[2] Subsection 152(4.2) of the Income Tax Act is part of a statutory scheme, referred to as the "fairness provisions" or the "fairness package", that gives the tax authorities the discretion to grant relief against the operation of certain provisions of the Income Tax Act. In the case of subsection 152(4.2), relief may be granted against the normal deadlines for reassessing income tax returns to reduce tax payable. The relevant parts of subsection 152(4.2) read as follows:

152 (4.2) Notwithstanding subsections 152(4), 152(4.1) and 152(5), for the purpose of determining, at any time after the expiration of the normal reassessment period for a taxpayer who is an individual (other than a trust) or a testamentary trust in respect of a taxation year,

(a) the amount of any refund to which the taxpayer is entitled at that time for that year, or

(b) a reduction of an amount payable under this Part by the taxpayer for that year,

the Minister may, if application therefor has been made by the taxpayer,

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, sur demande du contribuable:

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; ....

[3] The role of this Court is to determine whether the Judge chose and applied the correct standard of review, and in the event she did not, to assess the decision in light of the correct standard of review: Dr. Q. v. College of Physicians and Surgeons of British Columbia, [2003] 1 S.C.R. 226, at paragraph 43. The Judge described the standard of review as follows in paragraph 6 of her reasons:

The decision of the Court of Appeal in Queen v. Barron, [1997] 2 C.T.C. 198 (F.C.A.) at 200 clearly establishes that, with respect to the Minister's exercise of discretion under subsection 152(4.2) of the ITA, "the court may intervene and set aside the decision only if that decision was made in bad faith, if its author clearly ignores some relevant facts or took into consideration irrelevant facts or if the decision is contrary to law". This standard was applied to similar discretionary decisions in Sharma v. Canada Customs and Revenue Agency, [2001] 3 C.T.C. 169 at 176 (F.C.T.D.) and Cheng v. Canada, [2001] 4 C.T.C. 190 at 196 (F.C.T.D.).

[4] As I read the Barron case, it did not address the standard of review, but the grounds of review. The determination of the appropriate standard of review requires a pragmatic and functional analysis, taking into account the purpose of the statutory scheme, the scope of any applicable privative clause, the relative expertise of the tribunal and the reviewing court, and the nature of the question in dispute, with a view to determining whether the disputed decision should be reviewed on a standard of correctness, reasonableness, or patent unreasonableness.

[5] Despite the lack of discussion of this point in the reasons, the Judge applied the standard of patent unreasonableness, relying on the two cases cited in the quoted paragraph. However, it appears that the Judge was not referred to Hillier v. Canada (Attorney General) (2001), 273 N.R. 245, [2001] 3 C.T.C. 157, 2001 D.T.C. 5399 (F.C.A.), in which this Court applied the standard of reasonableness to a decision of a tax official for discretionary relief under another part of the "fairness package" (waiver of interest).

[6] The reasons in Hillier do not include the "pragmatic and functional analysis" described in Pushpanathan v. Canada (Minister of Employment and Immigration), [1998] 1 S.C.R. 982. That analysis, in the context of discretionary decisions under the "fairness package", would require consideration of the following factors:

(1) The fairness package was enacted because Parliament recognized the need for relief from certain provisions of the Income Tax Act that can result in undue hardship because of the complexity of the tax laws and the procedural issues entailed in challenging tax assessments. The granting of relief is discretionary, and cannot be claimed as of right. This factor would point to a standard of review that is more deferential than correctness.

(2) The decision under review cannot be appealed, but it is subject to judicial review by the Federal Court, and it is not protected by a privative clause. That would point to a reasonableness standard.

(3) The decision under review combines fact finding with a consideration of the policy of tax administration, and sometimes questions of law. The expertise of the decision maker is undoubtedly higher than that of the courts in relation to matters of the policy of tax administration. However, the expertise of the decision maker is not higher than that of the courts in relation to questions of law or findings of fact. That would point to a reasonableness standard.

[7] In my view, there is no relevant factor that points to a standard of review that is more deferential than reasonableness. Therefore, I must respectfully disagree with the decisions of the Federal Court in Sharma and Cheng and conclude that the standard of review in this case, as in Hillier, is reasonableness. As the Judge did not apply that standard to the decision under review, it is necessary for this Court to do so.

[8] I summarize the relevant facts as follows. Mr. Lanno was one of a large number of investors in a real estate project known as "Cherry Lane". In filing his income tax returns for 1993, 1994 and 1995, had claimed certain losses relating to that investment. By notices dated April 8, 1997, he was reassessed to disallow the losses on the basis that he had no reasonable expectation of profit from his investment in Cherry Lane. Many (not all) of the other investors were also reassessed.

[9] Mr. Lanno had the right to object to the April 8, 1997 reassessments within 90 days, and the evidence is that he intended to do so, but as it happened, no notices of objection were filed. Apparently, that is because Mr. Lanno believed that BDO Dunwoody, the accounting firm that had been retained to represent the Cherry Lane investors, would do so. The evidence was clear that BDO Dunwoody had undertaken to file notices of objection for the Cherry Lane investors they represented. Mr. Lanno authorized BDO Dunwoody to represent him, along with the other investors. The tax authorities apparently were aware that Mr. Lanno was being represented by BDO Dunwoody. Mr. Lanno contributed $500 to the fund used to pay BDO Dunwoody's fees.

[10] Unfortunately for Mr. Lanno, BDO Dunwoody did not file notices of objection for him, because Mr. Lanno had not provided them with copies of his notices of reassessment. Mr. Lanno says that he thought that BDO Dunwoody, as his authorized representatives, would have been provided with a copy of any notices of reassessment that were sent to him, and would file the required notices to protect his rights. He did not know that the tax authorities would not routinely provide copies of his notice of reassessment to his authorized representatives.

[11] Although Mr. Lanno was one of the investors that BDO Dunwoody had undertaken to represent, there is no evidence that BDO Dunwoody asked Mr. Lanno whether he had been reassessed, or advised him that he should provide them with copies of any notices of reassessment he received. In the result, Mr. Lanno did not learn until February of 2002 that no notices of objection had been filed for him. That was outside the time limit for seeking an extension of the time to file a notice of objection.

[12] On December 6, 2002, BDO Dunwoody made an application on Mr. Lanno's behalf for relief under subsection 152(4.2) of the Income Tax Act. The delay between February of 2002, when Mr. Lanno first learned that notices of objection had not been filed, and December 6, 2002, when BDO Dunwoody finally acted on Mr. Lanno's behalf to try and obtain relief, was not explained in the material submitted with Mr. Lanno's application for relief. Mr. Lanno explained in this Court that BDO Dunwoody thought it best to defer his application for relief. If that is true, it was a dubious strategy.

[13] On May 23, 2002, the Supreme Court of Canada rendered its decision in Stewart v. Canada, [2002] 2 S.C.R. 645. That case dealt a fatal blow to the "reasonable expectation of profit" theory, the basis of the reassessments that Mr. Lanno believed had been validly challenged. There is no doubt that, if Mr. Lanno had objected on a timely basis to his 1993, 1994 and 1995 reassessments, thus keeping the business loss issue alive, he would have benefited from the Stewart case in the sense that his objections would have succeeded, resulting in a refund. However, as no objections had been filed, the Minister was without authority to reverse the reassessments except as the result of a successful application by Mr. Lanno for relief under subsection 152(4.2) of the Income Tax Act.

[14] Mr. Lanno's application was denied, by a letter dated May 29, 2003 from Mr. Coelha, on the basis that the application was based solely upon a successful appeal to the Courts by another taxpayer, referring apparently to the Stewart case. That decision was intended to reflect the policy set out in paragraph 4(e) of Information Circular 75-7R3, "Reassessment of a Return of Income", which reads as follows:

4. A reassessment to create a refund ordinarily will be made upon receipt of a written request by the taxpayer, even if a notice of objection has not been filed within the prescribed time, provided that [...]

4. Sur réception d'une demande écrite du contribuable, le Ministère établit ordinairement une nouvelle cotisation pour donner un remboursement, même si un avis d'opposition n'a pas été produit dans le délai prescrit, pourvu [...]

(e) the application for a refund is not based solely upon a successful appeal to the Courts by a taxpayer.

e) que la demande de remboursement ne se fonde pas uniquement sur un appel devant les tribunaux d'un autre contribuable ayant eu gain de cause.

[15] The Judge considered the exception in paragraph 4(e) of Information Circular 75-7R3 to be a sound policy. I agree, and would adopt the explanation from paragraph 10 of her reasons:

The CCRA needs to be able to avoid a huge flood of reassessment applications every time a court decision impacts on taxpayers' liability. Thus, when a taxpayer is successful in an appeal of his tax liability to the Courts, refunds to other taxpayers who were not part of the litigation will not be paid if the successful appeal is the only reason for a refund application.

[16] However, it must also be said that in Mr. Lanno's case, if the exception in paragraph 4(e) of Information Circular 75-7R3 was not applicable, he should have been entitled to the benefit of the opening words of paragraph 4, which I reproduce for ease of reference (emphasis added):

4. A reassessment to create a refund ordinarily will be made upon receipt of a written request by the taxpayer, even if a notice of objection has not been filed within the prescribed time [...]

[17] By letter dated June 10, 2003, BDO Dunwoody asked for the May 29, 2003 decision to be reconsidered, on the basis that the application was not based solely on the Stewart case. The letter explained that notices of objection were not filed for Mr. Lanno because of his misunderstanding of the procedural requirements. The letter also pointed out that there were at least three other individuals in Mr. Lanno's position who had successfully obtained the relief that Mr. Lanno was seeking. BDO Dunwoody submitted that this was not a case of an individual seeking belatedly to take advantage of beneficial jurisprudence, but a case of an individual who honestly but mistakenly believed that his reassessments had been properly challenged.

[18] By letter dated July 30, 2003, Mr. Scarcello denied Mr. Lanno's application for reconsideration. However, the reasons for the denial appear to have changed. The July 30, 2003 letter reads in part as follows:

... I must take into consideration that BDO could have contacted Mr. Lanno when the majority of the other investors, who had paid for BDO to represent them, sent in the necessary documents. There is no indication that such action was taken. There is also no indication that there were circumstances beyond BDO's control that prevented the objection from being filed.

Third parties who provide a service for a fee are normally regarded as being responsible for the client where the client has suffered damages as a result of their actions. The Agency cannot assume responsibility for errors or omissions made by a taxpayer's representative.

[19] Mr. Scarcello does not comment on the difference in treatment between Mr. Lanno and the three other individuals mentioned in the June 10, 2003 letter from BDO Dunwoody.

[20] By letters dated August 2 and August 7, 2003, Mr. Lanno himself requested a further reconsideration, stressing the fact that he was being treated differently than three other individuals who were similarly situated. In a letter dated November 4, 2003, this request was denied by Mr. Scarcello. This time, the basis for denying Mr. Lanno any relief was stated as follows:

... under section 165 of the [Income Tax Act], filing an objection is the first step in the formal process to resolve disputes. The fairness provisions are discretionary. They cannot be used to extend the time limits specified in the ITA to file an objection.

Again, I did not find that there were circumstances in your case that were beyond your control, nor is there evidence of Agency error or delay. Therefore, the decision made on July 30, 2003 remains unchanged.

[21] I would make three observations about the November 4, 2003 letter. First, it is manifestly incorrect to say that the fairness provisions cannot be used to extend the time limits for the filing of a notice of objection. I refer again to paragraph 4 of Information Circular 75-7R3, "Reassessment of a Return of Income", which reads in part as follows (emphasis added):

4. A reassessment to create a refund ordinarily will be made upon receipt of a written request by the taxpayer, even if a notice of objection has not been filed within the prescribed time,[...]

[22] Second, the reference to the July 20, 2003 decision letter, and the statement that the decision in that letter remains unchanged, suggests that Mr. Scarcello may have concluded, as Mr. Coelho had done, that this was a case where relief should be precluded by the fact that Mr. Lanno's application for a refund was " based solely upon a successful appeal to the Courts by a taxpayer" (Stewart). In my view, that conclusion discloses a misapprehension of the relevant facts. The record establishes that Mr. Lanno's application was based on the fact that a number of misunderstandings had resulted in a failure to file timely notices of objection. Therefore, Mr. Lanno should have been entitled to favourable consideration under the general policy quoted above, which is ordinarily to grant requests for relief.

[23] Third, Mr. Scarcello failed to address the question as to whether or not there was any reason to treat Mr. Lanno differently from the three other individuals who had obtained relief. It is not possible to determine whether he ignored that submission, whether he thought that there was some relevant distinction, or whether he thought it acceptable to afford different treatment to similarly situated individuals. I must conclude that Mr. Scarcello failed to take into account a relevant consideration.

[24] In my view, these observations lead to the conclusion that the denial of Mr. Lanno's application for relief was not reasonable. I would allow this appeal with costs, set aside the judgment of the Federal Court, and allow Mr. Lanno's application for judicial review. I would quash the decision denying Mr. Lanno's application for relief under subsection 152(4.2) of the Income Tax Act and order that his application be referred to a different decision maker for reconsideration in accordance with these reasons.

(s) "K. Sharlow"

J.A.

"I agree.

Marshall Rothstein J.A."

"I agree.

M. Nadon J.A."

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET: A-478-04

APPEAL FROM THE ORDER OF MADAM JUSTICE SNIDER DATED JUNE 28, 2004 IN DOCHET T-2282-03

STYLE OF CAUSE: DENIS LANNO and CANADA CUSTOMS AND REVENUE AGENCY

PLACE OF HEARING: Toronto, Ontario

DATE OF HEARING: April 27, 2005

REASONS FOR JUDGMENT BY: SHARLOW J.A.

CONCURRED IN BY: ROTHSTEIN J.A.

NADON J.A.

DATED: May 2, 2005

APPEARANCES:

Denis Lanno

FOR THE APPELLANT

Andrea Jackett

FOR THE RESPONDENT

SOLICITORS OF RECORD:

Denis Lanno Cambridge, Ont.	ON HIS OWN BEHALF FOR THE APPELLANT
John H.Sims, Q.C Deputy Attorney General of Canada	FOR THE RESPONDENT

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Lanno v. Canada (Customes & Revenue Agency), 2005 FCA 153

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