Source: http://www.canadiantaxlitigation.com/category/administration-and-enforcement/page/2
Timestamp: 2019-04-18 18:24:05+00:00

Document:
Keeping an eye on Canadian tax litigation developments.
In Bolton Steel Tube Co. Ltd. v. The Queen (2014 TCC 94), the Tax Court of Canada allowed the taxpayer’s motion requesting an Order that would require the CRA to reassess the taxpayer in accordance with the terms of a settlement agreement. In doing so, the Tax Court discussed certain principles regarding settlement agreements and the resulting reassessments.
In Bolton Steel Tube, the CRA reassessed the taxpayer for its 1994, 1995, 1996 and 1997 taxation years on the basis that the taxpayer failed to report income in each of those taxation years (the “2007 Reassessment”).
In 1996, the taxpayer reported $1.2 million of income. The CRA added approximately $600,000 of unreported income for total income of $1.8 million. During examinations for discovery, the CRA’s representative admitted that approximately $200,000 of the $600,000 increase should not have been made. Accordingly, for the 1996 taxation year, the maximum amount of income the CRA could have added as unreported income was $400,000. The CRA further confirmed this admission in its Reply.
On June 15, 2012, the taxpayer delivered to the Crown an offer to settle which proposed to settle the appeals on the basis that (i) the CRA would vacate the reassessments for 1994, 1995 and 1997, and (ii) the CRA would reassess the 1996 taxation year to add $403,219 to the taxpayer’s income and impose a penalty under subsection 163(2) of the Income Tax Act (the “Act”). The Crown accepted this offer without further negotiation, and the parties entered Minutes of Settlement on these terms.
Following the settlement, the CRA issued a reassessment that calculated the taxpayer’s income for its 1996 taxation year to be $2,266,291, essentially adding $403,219 to the $1.8 million that had been previously assessed (the “2012 Reassessment”). The result was illogical: The agreed amount of unreported income – $403,219 – was added twice, and the $200,000, which the CRA had admitted was not to be added to the taxpayer’s income, was included as well.
The 2012 Reassessment was made without the taxpayer’s consent, which would be required pursuant to subsection 169(3) of the Act.
The Crown argued that if the 2012 Reassessment was varied or vacated then there had been no meeting of the minds, the settlement was not valid, and the 2007 Reassessment should remain under appeal.
The Tax Court agreed with the taxpayer on all three arguments.
With respect to the first argument, the Tax Court found the CRA’s interpretation of the Minutes of Settlement to be “divorced from the facts and law”. The Crown’s position was unsupportable since settlements must conform with the long-standing principal from Galway v M.N.R. (74 DTC 6355 (Fed. C.A.)) that settlements must be justified under, and in conformity with, the Act. In Bolton Steel Tube, the Tax Court went as far to say “even if both parties consented to settling in this manner, it could not be permitted” and “there is nothing to support the [Crown’s] interpretation and nothing to support the [Crown’s] further contention that the [taxpayer] offered this amount in exchange for other years to be vacated”.
With respect to the arguments surrounding subsection 169(3) of the Act, the Tax Court found that the taxpayer had not consented to having its income increased by the amount in the 2012 Reassessment.
The Crown argued that subsection 169(3) of the Act, which allows the CRA to reassess an otherwise statute-barred year upon settlement of an appeal, also allows the CRA to increase the amount of tax which the CRA could reassess despite subsection 152(5) of the Act. Subsection 152(5) of the Act is the operative provision that prevents the CRA from increasing an assessment of tax. Here, the Tax Court maintained the longstanding principle that a reassessment cannot be issued that results in an increase of tax beyond the amount in the assessment at issue. This is tantamount to the CRA appealing its own reassessment, which is not permitted, and thus renders the 2012 Reassessment void. We note that the Tax Court also considered the 2012 Reassessment to be void on the basis that it was an arbitrary assessment.
The Tax Court rejected the Crown’s argument that the settlement was ambiguous and therefore there was no meeting of minds as would be required for a valid contract. The Crown argued that the settlement was not valid and therefore the years under appeal should remain in dispute. The Tax Court turned to fundamental principles of contractual interpretation and found that the contract validly existed since it could reasonably be expected that the Crown would have known that the addition of $403,219 was to be added to the appellant’s income as originally reported (i.e., $1.2 million) and not to the income amount in the 2007 Reassessment (i.e., $1.8 million).
Accordingly, the Tax Court rejected the Crown’s argument, found that the settlement was valid and that the Minister should reassess on the basis that $403,219 should be added to the taxpayer’s income as originally reported. Since the 2012 reassessment was not valid, and therefore did not nullify the 2007 reassessment, and a notice of discontinuance had not yet been filed, the Tax Court continued to have jurisdiction over the appeal.
The result of this motion was a clear victory for the taxpayer and for common sense. It serves as a reminder that precision is essential when entering into settlement agreements.
In Roitelman v. The Queen (2014 TCC 139), the Tax Court considered whether a director could establish that he had been duly diligent in his attempts to prevent his company’s failure to remit source deductions where he had delegated responsibility for the company’s bookkeeping and tax filings to an employee.
The taxpayer owned an electrical contracting business that focused primarily on commercial and industrial contracting, installations and service work. Initially, the taxpayer personally completed all payroll and remittance filings. As his business expanded, the taxpayer was required to travel more frequently, thus spending less time in his office. Consequently, the taxpayer hired and trained a bookkeeper. He oversaw her work and at the outset ensured remittances were made in a timely fashion. After the employee assumed responsibility for the bookkeeping, the corporation did not remain current in its remittance obligations. From August 2005 to March 2008, the CRA sent five letters to the corporation regarding repeated failures to remit. From October 2006 to March 2008, the CRA sent seven Notices of Assessment in respect of the unremitted source deductions. The taxpayer did not receive nor was he personally aware of many of these letters and assessments. Later, after the bookkeeper had been dismissed, the taxpayer discovered hidden documents and unsent remittance cheques in various locations in the office.
For 2006 and 2007, the CRA assessed the taxpayer for directors’ liability for unremitted source deductions under subsection 227.1(1) of the Income Tax Act. The taxpayer appealed to the Tax Court and relied on the due diligence defence under subsection 227.1(3) of the ITA.
The Tax Court allowed the appeal. The Court found the taxpayer established a due diligence defence and thus he was not personally liable for the unremitted amounts.
The Court reviewed the key decisions on the issue, and noted that the applicable test from Buckingham v. The Queen (2011 FCA 142) is objective and contemplates the degree of care, diligence and skill exercised by the director in preventing a failure to remit. The Court also cited Balthazard v. The Queen (2011 FCA 331) for the proposition that after-the-fact behavior and corrective measures can be relevant in certain circumstances.
 The test does not dictate that the positive steps taken must be effective in ensuring future compliance but only that a director takes those steps and that those steps would be the proactive steps that a reasonably prudent person would have exercised in comparable circumstances.
The Court stated that it was reasonable for the taxpayer to expect his bookkeeper to bring any essential correspondence to his attention, and it was reasonable for him to believe that when he signed remittance cheques that they were being forwarded to the Receiver General. There was no evidence that the taxpayer benefited or intended to benefit in any way from the company’s failure to remit.
Despite his actions (i.e., hiring and training the bookkeeper, delegating responsibility, etc.), the taxpayer was unable to discover or ascertain the extent of the remittance failures. The bookkeeper thwarted his attempts to ensure compliance. The Court held that the taxpayer could not reasonably have known that the bookkeeper would engage in fraudulent and misleading activities.
Roitelman is an interesting case because there are very few decisions in which a taxpayer is able to establish a due diligence defence where he/she delegates responsibility for bookkeeping/remittances and relies on the work of that other person. In Kaur v. The Queen (2013 TTC 227), the Tax Court stated, “… The director’s oversight duties with respect to [remittance obligations] cannot be delegated in their entirety to a subordinate, as was done in the present case.” In Roitelman, the taxpayer had admitted that he relied on “blind faith” that the remittances had been made in a timely fashion. However, the result in Roitelman reminds us that such reliance may still be reasonable where there was deceit and fraud perpetrated on the director by a subordinate.
Governments and tax authorities continue to develop their fiscal and tax positions relating Bitcoins. Many countries are releasing warnings about the risks associated with the use of Bitcoins, with some providing more concrete guidance on regulation and tax treatment of the digital currency.
Earlier this year, the United States Law Library of Congress surveyed over 40 countries for their official stances on Bitcoin to determine whether and how Bitcoins are used, regulated and taxed in those foreign jurisdictions. Most of the comments addressed three main themes: Bitcoin’s status (or lack thereof) as legal tender, consumer protection, and taxation.
Most notable in the survey are China and Brazil: Both countries have imposed significant regulations with respect to Bitcoins. In China, Bitcoins are treated as a special virtual commodity. It is not considered a currency, and banks and payment institutions are prohibited from dealing in Bitcoin. Brazil enacted a law in late-2013 that has created the possibility of normalization of electronic currencies like Bitcoin. The law lists the principles that must be observed by the payment arrangements and institutions, according to the parameters to be established by the Brazilian Central Bank.
Brazil stands alone with its Bitcoin regulation amongst its Central and South American counterparts. Neighboring jurisdictions have not provided for any formal regulation of the virtual currency despite its increased use. In Chile, a group of American Libertarians founded an organic farming community with an economy based on Bitcoins. In Nicaragua, an American banker bought a plot of land in one of the most important tourist areas in the country for 80 Bitcoins (roughly USD $72,000 at the time) and has since been encouraging the adoption of Bitcoin.
The United Kingdom announced that it will treat Bitcoins like any other form of payment for tax purposes: Value Added Tax will be due in the normal way from suppliers of any goods or services sold in exchange for Bitcoins. The European Union (EU) has passed no specific legislation relative to the status of the Bitcoin as a currency. In France, Germany, Finland and Estonia, the authorities have stated that Bitcoin is an alternative means of payment but not an official currency, and as a result revenues generated are subject to taxation.
The Central Bank of the Russian Federation stated that services of Russian legal entities aimed at assisting the exchange of Bitcoins for goods, services, or currencies are a “dubious activity” associated with money laundering and terrorism financing. The statement recommended that Russian individuals and legal entities refrain from transactions involving Bitcoins. Similarly, the Reserve Bank of India issued a public notice to users, holders and traders of virtual currencies (including Bitcoins) regarding the potential risks, financial and otherwise, to which they are exposed. Following the advisory, India’s largest Bitcoin trading platform suspended its operations, citing the notice.
At present, Hong Kong has no legislation directly regulating Bitcoins and other virtual currencies. However, existing laws provide sanctions against unlawful acts involving Bitcoins, such as fraud or money laundering. Singapore has reportedly published tax advice with respect to Bitcoins, noting that the digital currency is not considered a good nor does it qualify as currency but will be assessed under the Goods and Services Tax. Malaysia and Japan have not issued statements regarding Bitcoins.
As for the countries not surveyed by the United States or countries that have yet to take an official position on Bitcoins, time will tell as to how the digital currency will be adopted and integrated in different jurisdictions.
For now, the regulatory and tax discussions are as young as the currency. As Bitcoin use and acceptance increases, fiscal and tax authorities will face a more complex debate that will demand more than simply providing public warnings of the risk of Bitcoin use.
McIntyre: Not What You Bargained For?
When are the parties to a civil tax dispute bound by agreed facts from a criminal proceeding?
This was the question considered by the Tax Court of Canada on a Rule 58 motion made by the taxpayers in McIntrye et al v. The Queen (2014 TCC 111). Specifically, the taxpayers argued the principles of issue estoppel, res judicata, and abuse of process applied to prevent the Minister of National Revenue (the “Minister”) from assuming facts inconsistent with agreed facts from a prior criminal guilty plea.
In McIntyre, two individuals and their corporation were audited for the 2002 to 2007 tax years. The individuals and the corporation were charged with criminal income tax evasion. As part of a plea bargain, one individual and the corporation plead guilty based on certain agreed facts, and the court imposed sentences accordingly. The other individual was not convicted.
Subsequently, the Minister issued GST reassessments of the corporation, and further reassessments of the individuals for income tax. In issuing the reassessments, the Minister refused to be bound by the agreed facts from the criminal proceeding. In the Notices of Appeal in the Tax Court, the taxpayers argued the reassessments must be consistent with the agreed facts.
The taxpayers brought a motion under section 58 of the Tax Court Rules (General Procedure) for a determination of a question of law or mixed fact and law before the hearing of the appeals. Specifically, the taxpayers asked (i) whether the doctrines of issue estoppel, res judicata and abuse of process prevented the Minister from making assumptions inconsistent with the agreed facts, and (ii) whether the parties were bound by the agreed facts in respect of the calculation of certain capital gains, shareholder debts, losses and shareholder benefits.
The taxpayers argued that it was appropriate to deal with these issues before the hearing, whereas the Crown argued that these issues could not be determined on a Rule 58 motion because, in this case, the facts arose from a plea bargain rather than a determination by a court, the agreed facts did not address the GST liability of the corporation or the other individual’s income tax liability, and the facts (and tax liability) of a criminal proceeding would only prohibit the parties from alleging a lower tax liability in a civil proceeding.
The Tax Court dismissed the taxpayer’s motion. The Court considered the applicable test on a Rule 58 motion, namely that there must be a question of law or mixed fact and law, the question must be raised by a pleading, and the determination of the question must dispose of all or part of the proceeding (see HSBC Bank Canada v. The Queen, 2011 TCC 37).
 I agree with the Respondent’s analysis of the caselaw. It confirms that prior convictions in criminal proceedings resulting from plea bargains, although a factor that may go to weight in a civil tax proceeding, are not determinative of the relevant facts and issues in a subsequent tax appeal.
 In MacIver v The Queen, 2005 TCC 250, 2005 DTC 654, Justice Hershfield also concluded that a question is best left to the trial Judge where the motion is merely to estop a party from contesting certain facts that will not dismiss an entire appeal. As noted in his reasons, unless such a question can fully dispose of an appeal by finding that issue estoppel applies, a Rule 58 determination could do little more than split an appeal and tie the hands of the trial Judge.
The Court noted that the agreed facts did not address the corporate GST liability or the second individual’s income tax liability, dealt only with the 2004 to 2007 tax years, and did not address the imposition of gross negligence penalties. The Court concluded that issue estoppel would not apply because there was not a sufficient identity of issues between the criminal and civil proceedings. It would be unfair, the Tax Court stated, to prohibit the parties from adducing evidence in the civil tax appeals where there had been no introduction and weighing of evidence in the criminal proceeding.
In Salisbury House of Canada Ltd. et al. v. The Queen (2013 TCC 236), the Tax Court of Canada reiterated the importance of the statutory preconditions that must be met before a taxpayer may appeal to the Court. These statutory requirements should be kept in mind by taxpayers who wish to ensure their disputes are heard on the substantive merits rather than dismissed for procedural reasons before they have an opportunity to argue their case.
In Salisbury, the corporate taxpayer operated several restaurants in the Winnipeg area. The company was assessed additional GST for the period February to June, 2006 but did not object to those assessments. Around the same time, a new board of directors was elected. Due to financial difficulties, the company made a proposal under the Bankruptcy and Insolvency Act and attempted to negotiate an agreement with the CRA pertaining to the GST arrears. The parties eventually agreed that a portion of the GST liability would be paid. Importantly, at this point, no directors’ liability assessments had been issued under s. 323 of the Excise Tax Act. Payment was remitted, but the directors sought to have their potential liability for tax determined “by a court of competent jurisdiction”.
The company and the individual directors each filed a Notice of Appeal in the Tax Court. In response, the Crown brought a motion to dismiss the appeals pursuant to paragraph 53(b) of the Tax Court of Canada Rules (General Procedure) on the grounds that (inter alia) the appeals were scandalous, frivolous or vexatious.
Under section 306 of the Excise Tax Act, a taxpayer must file a notice of objection before a Notice of Appeal may be filed in the Tax Court. In Salisbury, the GST assessments against the corporate taxpayer had not been challenged by way of objection and there had been no assessments issued against the directors. The Minister argued that the appellants had no statutory right of appeal because the requirements of section 306 had not been met.
The Tax Court granted the Minister’s motion and dismissed the appeals. Since no notices of objection had been filed by the company, this precluded an appeal from the original GST assessments. In respect of the appeals by the individual directors, the Court held that they too could not succeed – no assessments had been issued, and no notices of objection filed.
The Salisbury decision is consistent with a long line of jurisprudence reflecting the requirement that taxpayers must satisfy the statutory preconditions before appealing to the Tax Court. In Roitman v. The Queen (2006 FCA 266), the Federal Court of Appeal stated that a court “does not acquire jurisdiction in matters of income tax assessments simply because a taxpayer has failed in due course to avail himself of the tools given to him by the Income Tax Act.” More recently, in Goguen v. The Queen (2007 DTC 5171), the Tax Court reiterated that, as “a matter of law, the failure of the [taxpayer] to serve a notice of objection on the Minister deprive[s] the Tax Court of Canada of the jurisdiction to entertain an appeal in relation to the assessment” (see also Whitford v. The Queen (2008 TCC 359), Bormann v. The Queen (2006 FCA 83), and Fidelity Global Opportunities Fund v. The Queen (2010 TCC 108)).
Salisbury reminds corporate and individual taxpayers of the need to obtain proper advice from tax professionals with respect to their rights and obligations under the Excise Tax Act and the Income Tax Act. This is all the more important in cases where the corporation is experiencing financial difficulty and/or contemplating protection under the Bankruptcy and Insolvency Act (i.e., as the CRA may be a primary creditor). In Salisbury, the directors may not have been personally liable for corporate taxpayer’s GST liability. However, because of the manner and timing of the payment of GST arrears, their “appeal” to the Tax Court was defeated on procedural rather than substantive grounds and they were, unfortunately, precluded from presenting their case.
The Canada Revenue Agency’s Voluntary Disclosure Program (VDP) has gone through a number of organizational changes over the past few years. For many years, disclosures were made to the local Tax Services Office. More recently, the CRA has moved the handling of disclosures to Regional Centres; Shawinigan – Sud Tax Centre for the Atlantic, Quebec, and Ontario Regions, Winnipeg Tax Centre for the Prairie Region and Surrey Tax Centre for the Pacific Region.
With the move of the VDP to Regional Centres, the CRA has implemented a new screening process. Screeners are now reviewing disclosure packages soon after receipt and are comparing the package to a CRA developed checklist. If any item on the checklist is missing or incomplete, then the CRA returns the package to the sender, along with a covering letter and a checklist that identifies the missing or incomplete information. There are, however, certain issues that have arisen with respect to the CRA’s screening process and use of the checklist.
First, it prevents a disclosure from being made by a taxpayer who does not have a social insurance number, business number, etc. If an identification number is not available, the disclosure may need to be made on a no-names basis while the taxpayer applies for an identification number.
Second, the CRA will not accept a disclosure if the amount in issue is not identified. This is problematic as, often, disclosures are made before the work needed to calculate the omitted or under-reported amount has been completed. In the past, this information was forwarded within 90 days of filing the disclosure and was an approach acceptable to the CRA.
Third, where the disclosure package is large, screeners do not appear to be reviewing all of the documents before issuing the letter and checklist. Therefore, it is advisable to use a covering letter for each disclosure package which identifies compliance with each item on the CRA’s checklist and a detailed explanation as to why any checklist item is outstanding. It is not yet clear whether, even upon explanation, the CRA will accept a disclosure if a checklist item is outstanding.
A Canada Revenue Agency (“CRA”) audit initiative is targeting taxpayers who have recently sold condominium units they did not occupy or occupied for only a short period of time (the “CRA Condo Project”).
The CRA is reassessing some of these dispositions on the basis that the condo was sold in the course of business, treating the profit as income (instead of capital gains) and, in some cases, assessing gross negligence penalties under subsection 163(2) of the Income Tax Act. In doing so, the CRA may be incorrectly reassessing some taxpayers whose gains are legitimate capital gains and that may be subject to the principal residence exemption (click here for a discussion of the principal residence exemption).
Consider this example. A taxpayer signs a pre-construction purchase agreement for a condo in 2007. In 2009, the unit was completed and occupied by the taxpayer, before the entire development was finished and registered in land titles. Land titles registration occurs in 2010, but shortly thereafter the taxpayer sells the condo for a profit. Ordinarily, one would conclude the condo was held on account of capital and the gain would be at least partially exempt from tax on the basis that condo was the taxpayer’s principal residence. The CRA may be inclined to reassess on the basis that land title records show the taxpayer on title for only a short time, as though the taxpayer had intended to merely “flip” the condo rather than reside in it.
This assessing position may be incorrect because the buyer of a condo does not appear on title until the entire condominium development is registered. In fact, several years can pass from the date of signing the purchase agreement to occupancy to land titles registration – and, accordingly, the taxpayer’s actual length of ownership will not be apparent from the land title records.
This type of situation could cause serious problems for some taxpayers. If a taxpayer is audited and subject to reassessment on the basis that their entire gain should be taxed as income, the taxpayer will need to gather evidence and formulate arguments in time to respond to an audit proposal letter within 30 days, or file a Notice of Objection within 90 days of the date of a reassessment.
Evidence showing the taxpayer cared for a sick or infirm relative, or had a disability that precluded using a condo as a residence.
Taxpayers should be prepared to provide reasonable explanations for any gaps in the evidence. If a taxpayer wishes to explore how best to respond in the circumstances, they should consult with an experienced tax practitioner.
The Canada Revenue Agency had an important win this week in its efforts to access information outside of Canada. On March 20, 2013, the Federal Court issued its decision in Soft-Moc Inc. v. M.N.R. 2013 FC 291, dismissing Soft-Moc’s judicial review application to have the CRA’s decision to issue a Foreign-Based Information Requirement set aside or varied.
The CRA has broad powers to access information related to the determination of a taxpayer’s tax obligations. Under subsection 231.6 of the Income Tax Act, these powers include the issuance of a Foreign-Based Information Requirement to obtain information or documents located outside of Canada.
In Soft-Moc, the CRA was conducting a transfer pricing audit and sought information from corporations in the Bahamas who provided services to Soft-Moc. These corporations and their individual Bahamian resident shareholder owned 90% of the common shares of Soft-Moc. The CRA issued a Foreign-Based Information Requirement to Soft-Moc under subsection 231.6(2) of the Income Tax Act.
The Requirement requested substantial amounts of information related to the Bahamas Corporations including extensive details of the services provided, customers, financial statements, costs and profits and employee data. Soft-Moc applied for judicial review of the decision to issue the requirement.
Primarily, Soft-Moc argued that the information requested went well beyond that necessary to enable the CRA to complete the transfer pricing audit and that the decision to issue the requirement was, therefore, unreasonable. Soft-Moc argued that a portion of the information requested was irrelevant and that some portions were confidential or proprietary.
The Court was not sympathetic to Soft-Moc’s arguments, noting the wide-ranging statutory powers of the CRA to collect information and the low threshold to be met in determining whether the requested information is relevant and reasonable.
This win, which was not surprising in light of the Federal Court of Appeal’s earlier decision in Saipem Luxembourg S.A. v. The Canada Customs and Revenue Agency, 2005 FCA 218, will encourage the CRA to continue to use foreign-based requirements more frequently and earlier in the audit process.
The taxpayer in this case, NRT Technology Corp, successfully applied before the Federal Court for judicial review in respect of a decision of an Assistant Director of the Toronto Tax Services Office of the Canada Revenue Agency denying NRT’s request for the cancellation of a penalty under the Taxpayer Relief Provisions pursuant to subsection 220(3.1) of the Income Tax Act (Canada). The style of cause is NRT Technology Corp v. Attorney General of Canada, 2013 FC 200.
On February 26, 2006, NRT paid a bonus to its President in the amount of $7,093,000 (the “Bonus”). On March 14, 2006, NRT remitted corresponding withholding payroll taxes in the amount of $2,848,548.80. On March 23, 2006, CRA assessed NRT for a 10% late remitting penalty in the amount of $284,805 as NRT had accelerated remitter status which it was notified of by the CRA in November 2005. CRA determined that NRT ought to have remitted the $2,848,548.80 on March 3, 2006 and its failure to do so warranted the assessment of a penalty.
Upon payment of the Bonus, NRT was advised by its tax advisor to hold off on the payroll remittances to the CRA until further instruction was received by her. On March 13, 2006, NRT’s tax advisor indicated that she had been advised by the CRA that NRT was obliged to withhold and remit the full amount of tax due on the payment of the Bonus by March 15, 2006. On March 14, 2006, NRT remitted the payroll taxes on account of the payment of the Bonus.
On November 9, 2006, in response of a relief request dated September 13, 2006 by NRT, the CRA denied the request stating that a “review of the account history and the circumstances outlined in [NRT’s] letter [had] failed to substantiate that [NRT was] prevented from complying with the [CRA’s] requirements.” The CRA further indicated that NRT failed to demonstrate that the lateness was the result of extenuating circumstances or the result of CRA departmental error and that as a result, the directors of NRT did not exercise reasonable care with respect to the remittance.
On July 18, 2007, NRT filed for a second administrative review in relation to the taxpayer relief request. In a letter dated December 14, 2007, the Director denied the requested relief.
Under the second level review process, an officer reviews the applicant’s second level review submissions and prepares a recommendation report for the review of the Director. The Director then decides whether to grant the relief sought. In this case, the officer’s report and ultimate decision made by the Director and communicated to NRT by letter dated December 14, 2007 were at issue (the “Decision Letter”).
The officer’s report recommended that relief should not be granted on the basis that NRT exhibited a degree of carelessness in its handling of the Bonus and failed to act quickly to remedy the error. In accepting the recommendation in the officer’s report, the Decision Letter indicated that there was no evidence that NRT was misdirected by the CRA or that the CRA failed to provide information to NRT in a timely manner. It was further stated that NRT was careless in its handling of the bonus and was not quick to remedy the error.
The focus of the Federal Court’s analysis was on the reasonableness of the impugned second level decision.
It was NRT’s contention that given the broad authority available to the Minister to grant relief under s. 220(3.1) and the extraordinary circumstances, the Minister’s decision to deny relief was unreasonable. Further, no reasons were given as to how NRT failed to quickly act to remedy the error that had been committed. NRT noted that once its tax advisor had advised it to remit, it did so without delay.
In noting that deference was owed to the CRA under the reasonableness standard of review, the Crown reiterated its reasons as outlined in the Decision Letter in support of its position.
The Federal Court noted that it was not clear what exactly the “error” was which was not acted upon quickly enough. If the “error” was failing to remit on or before March 3, 2006, this error was rectified with NRT’s remittance on March 14, 2006, a day after it was advised by its tax advisor that such remittance was required immediately, contrary to NRT’s belief that the remittance was required by March 15, 2006.
If the “error” was not paying the penalty in a timely manner, the Federal Court noted that the offsetting amount pursuant to the flow-through shares acquired by NRT was not accounted for until August 2006. As such, there was no way for NRT to know how much was owed until that time. Moreover, the reduced amount owing was offset against GST refunds in November 2006. If this was in fact the “error” referenced in the Decision Letter, NRT had taken steps to reduce the amount and ultimately settle the balance in a timely manner.
The impact of this decision goes beyond merely chastising the CRA for a poorly written letter. There appears to be a “cut and paste” approach applied by the CRA from time to time which may cause a reasonable observer to believe that the taxpayer’s circumstances were not fully considered, particularly where the taxpayer’s conduct reflects a considerable degree of due diligence. It is hoped that this decision will cause those at the CRA who are responsible for reviewing taxpayer relief requests to thoroughly consider the circumstances of each case, particularly where quick action was taken in the direction of compliance – taxpayers deserve no less.
On February 21, 2013, the Federal Court of Appeal released two decisions related to the obligations of the Minister of National Revenue when making ex parte applications under subsection 231.2(3) of the Income Tax Act (the “Act”) for judicial authorization requiring taxpayers to produce certain information and documents relating to customers. In Minister of National Revenue v. RBC Life Insurance Company et al., 2013 FCA 50, the FCA affirmed the decision of the Federal Court (reported at 2011 FC 1249) cancelling four authorizations issued by the Federal Court in relation to customers of the Respondent companies who had purchased a particular insurance product that has been described as “10-8 insurance plans”. In Minister of National Revenue v. Lordco Parts Ltd., the FCA adopted its reasoning in RBC and again affirmed a judgment of the Federal Court cancelling an authorization that had required information in respect of certain employees of the Respondent.
In both cases, the FCA reaffirmed the Minister’s “high standard of good faith” and the powers of the Federal Court to curtail abuses of process by the Crown.
The GAAR committee had determined the plans complied with letter of Act.
The FCA held that the Federal Court’s finding that these facts were relevant was a question of mixed fact and law and the Minister had not demonstrated palpable and overriding error by the Federal Court judge. At a minimum, this suggests the Crown may have to disclose information of the sort included in the enumerated list. Examining that list is interesting and suggests a requirement to include in the disclosure to the Federal Court judge hearing an ex parte application facts related to legislative history and intent including discussions about potential problems and possible legislative “fixes”, internal analysis of issues within the CRA including other advance income tax rulings, motivations on the part of the CRA and its officers and agents that may extend beyond auditing the particular facts, and previous analysis of the facts known to the CRA and indications that those facts might support compliance with the Act and inapplicability of the GAAR. That is a very extensive list, and it is encouraging to know that Crown obligations extend into each of these areas.
 In seeking an authorization under subsection 231.2(3), the Minister cannot leave “a judge…in the dark” on facts relevant to the exercise of discretion, even if those facts are harmful to the Minister’s case: Derakhshani, supra at paragraph 29; M.N.R. v. Weldon Parent Inc., 2006 FC 67 at paragraphs 153-155 and 172. The Minister has a “high standard of good faith” to make “full disclosure” so as to “fully justify” an ex parte order under subsection 231.1(3): M.N.R. v. National Foundation for Christian Leadership, 2004 FC 1753, aff’d 2005 FCA 246 at paragraphs 15-16. See also Canada Revenue Agency, Acquiring Information from Taxpayers, Registrants and Third Parties (issued June 2010).
Overall, the RBC decision strongly reaffirms the role of the Federal Court in ensuring the Minister acts in good faith when making ex parte applications. Given the broad powers granted in subsection 231.2(3) and elsewhere in the Act, it is reassuring to know that the Courts can, and will, protect taxpayers and citizens generally by ensuring that the CRA puts all relevant information before the Court when it seeks to exercise those powers.
Wilson: SCC Overhauls Standard of Review?

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