Hubert J. Barron and Barbara L. Barron v. Minister of National Revenue, [1996] 3 CTC 121, 96 DTC 6262

Jerome J.T.C.C.: —

Facts

This application for judicial review of the decisions of the Minister of National Revenue (the “Minister”) made pursuant to subsection 152(4.2) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended (the “Act”), wherein the applicants’ claims for discretionary relief for statute-barred taxation years were refused, came on for hearing before me at Vancouver, British Columbia, on April 12, 1995. The parties were reconvened for further argument on December 5, 1995. At the conclusion of those deliberations, I took the matter under reserve and indicated that these written reasons would follow.

The applicants’ troubles with Revenue Canada began when they were preparing their 1988 Income Tax Returns. Mr. Sheard of the Victoria District Office alerted the applicants to the fact that Mrs. Barron had not made the maximum deduction allowed to her on her 1985 return. The Act did not allow for amendments after three years so Mrs. Barron sought to amend her 1985 return in 1988, triggering a number of complications.

Ms. Paula Harper reviewed the applicants’ returns and informed the Barrons that they had committed errors and owed several thousand dollars in back taxes. The applicants appealed this assessment. Mr. Ken Chow, an Appeals Officer in the Victoria District Office, reviewed Ms. Harper’s work and determined that she had overlooked approximately $25,000 in losses, of which $12,000.00 could be claimed immediately by the Barrons. Mr. Chow drew up an agreement which set out corrections to the Barrons’ returns whereby they would both be allowed to claim $6,000.00 in losses for 1988, in return for withdrawing the Notices of Objection which they had filed in response to Ms. Harper’s reassessment. However, the Barrons did not need to claim the $6,000.00 in losses for 1988 and sought to claim them in other taxation years. They also recalculated their business expenses and claim that Ms. Harper overlooked roughly $43,000.00, not $25,000.00 in losses. They therefore rejected the agreement drawn up by Mr. Chow and initiated numerous appeals, none of which were resolved in their favour.

In 1990, when the Barrons began their appeals, taxpayers were not permitted to file amended tax returns if three years had elapsed since the date of the taxation year in question. In 1991, Parliament amended the Act to include a “Fairness Package” which granted discretion to the Minister of National Revenue to reassess tax, interest or penalties payable by a taxpayer in previously statute-barred years back to 1985 (subsection 152(4.2)). The relevant provision reads as follows:

152 (4.2) [Reassessment with taxpayer’s consent]. Notwithstanding subsections (4), (4.1) and (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,

(c) reassess tax, interest or penalties payable under this Part by the taxpayer in respect of that year, and

The Minister’s discretion under this subsection has been delegated to local offices. The Victoria District Office struck a “Fairness Committee” to review files under the fairness legislation.

The Decisions of the Fairness Committees

The Barrons’ income tax problems were reviewed on two occasions by Fairness Committees. On November 16, 1992, the Deputy Minister of National Revenue wrote to the Barrons regarding the fairness legislation. He told them that, “Senior Officials have reviewed your case, and they have informed me that there are no provisions in the law to permit further consideration of your 1988 to 1990 tax years.” In addition, on October 13, 1993, a member of the Victoria Fairness Committee wrote to the Barrons to inform them of a second review of their case by the Committee. He wrote, “The Fairness Committee have reviewed the files in detail and have noted that there is no new information contained in the returns which would cause adjustments to be processed for the years in question [1987, 1988, 1989, 1990].”

Review of Fairness Committee's Decision

A review of the proceedings before the Fairness Committee reveals two reviewable errors. The first occurred when the applicants were not afforded an opportunity to make representations to the Fairness Committee nor made aware of the factors which the Fairness Committee would consider. A similar concern was raised before me in the immigration context. In Sobrie v. Canada (Minister of Employment & Immigration) (1987), 3 Imm. L.R. (2d) 81 (F.C.T.D.), the applicant, who had applied for consideration as a Convention refugee, was not permitted to make separate representations regarding admission to Canada on humanitarian and compassionate grounds. The Ministry’s practice was to make this second determination based on information contained in the refugee file, a situation which breached the Minister’s duty of fairness. I wrote that:

The intention [of a review on humanitarian and compassionate grounds] is to provide a fresh view of the immigrant’s situation from a new perspective. It follows that for the Minister to fairly consider an application under this section, he must be able to direct his mind to what the applicant feels are his humanitarian and compassionate circumstances. These may have nothing to do with the facts contained in the file of his previous immigration proceedings. ... if the applicant has information which is relevant and significant to the exercise of jurisdiction under section 115(2) [now section 114(2)], fairness requires that he should have a chance to present it. (ibid. at 89)

The Federal Court of Appeal came to the same conclusion in Muliadi v. Canada (Minister of Employment & Immigration), [1986] 2 F.C. 205, 66 N.R. 8. Mr. Muliadi had made an application for permanent residency under the entrepreneurial category. He submitted a business proposal to the visa officials in Singapore who passed it on to an official in the Ontario Ministry of Industry for evaluation. This provincial official determined that the business plan was not viable and that Mr. Muliadi should not qualify for permanent residency. Mr. Muliadi was informed of this decision by a visa officer who did not exercise discretion with respect to granting permanent residency. The Court of Appeal had this to say at page 215 (N.R. 15-16):

Returning to the matter of the Province of Ontario assessment I do not view its receipt by the visa officer as bad in itself. In fact its reception was contemplated and even authorized by the appellant at the time of his application and subsequently. Nevertheless, I think it was the officer’s duty before disposing of the application to inform the appellant of the negative assessment and to give him a fair opportunity of correcting or contradicting it before making the decision required by the statute. It is, I think, the same sort of opportunity that was spoken of by the House of Lords in Board of Education v. Rice, [1911] A.C. 179 in these oft-quoted words of Lord Loreburn L.C., at page 182:

They can obtain information in any way they think best, always giving a fair opportunity to those who are parties in the controversy for correcting or contradicting any relevant statement prejudicial to their view.

The Barrons were never made aware of how the Fairness Committee would deliberate nor of which factors it would consider in making its decision about re-opening statute-barred taxation years. They were denied an opportunity to participate in the proceedings and therefore to confront the case against them.

The Fairness Committee also committed an error of law when it misapplied the fairness legislation. The affidavit of Mr. G. Ronald Frolek, Director - Taxation in the Victoria District Office, sworn July 27, 1994, indicates at paragraph 15 that, “[t]he Committee determined that the Applicants’ request did not fall within the intent and guidelines of Bill C-18, the legislation known as the Fairness Package.” The intent and guidelines are related in Information Circular 92-3, Guidelines For Refunds Beyond the Normal Three Year Period at paragraphs 1 and 7, respectively:

1. ... The legislation gives discretion to assess or reassess an income tax return to give a refund, or to apply a refund against amounts owing, where this would otherwise be prohibited by statute (statute barred). The legislation allows refunds to be issued or applied for taxation years dating back to 1985.

7. The Department will issue a refund or reduce the amount owed if it is satisfied that such a refund or reduction would have been made if the return or request had been filed or made on time, and provided that the necessary assessment is correct by law and has not been previously allowed.

The necessary elements to a determination that the fairness legislation should be invoked are an indication that the refund or reduction would have been valid had it been made on time, and that the assessment be correct by law. I am satisfied that were it not for the Minister’s erroneous audit, the applicants would have filed their amended 1985 tax returns within the three year time period and would have been able to deduct their business losses as determined under the Act. Therefore, the fairness legislation was not properly applied by the Fairness Committee.

Remedy

The decision of the Fairness Committee is therefore set aside. A freshly-constituted Fairness Committee is ordered to reconvene and, in a manner consistent with the law and these reasons, to consider all aspects of this matter, to inform the Barrons of the factors they intend to take into account and to provide the Barrons with an opportunity to make representations.

Review allowed.