Applying for Taxpayer Relief of Penalties Incurred from Unreported Income
Upon the completion of the Federal Court hearing for Sulochana Shantakumar v. Attorney General of Canada 2018 FC 677 on June 29, 2018, Justice Ahmed decided in the favour of the taxpayer.
The case involved an elderly taxpayer who did not report her pension income on a prior year tax return because she did not receive her pension slip for that particular year in the manner she was accustomed, i.e. in the mail. She applied for relief of the penalties assessed ("taxpayer relief application or TPR") based on this reason and human rights grounds twice, and was rejected both times.
For taxpayer's who have filed or are interested in filing taxpayer relief applications for penalties from income not reported for reasons beyond their control, this case should provide some comfort that the courts will expect the CRA to take into account a taxpayer's circumstances, even if specific evidence for this is not initially provided. This case also highlights that weak arguments and inconsistencies in a CRA review cannot be concluded to be of sound judgement.
Aggressive and blanket decisions made by the CRA without appropriately considering all of the evidence is something that Canadian tax lawyers continue to discover and argue against, and this case brought another example of why the CRA's conclusions can often be far from true and just.
Facts of the Case
Mrs. Shantakumar is a 70 year old Canadian citizen, a nurse, and the caregiver of her disabled husband and daughter. She receives a pension from the Healthcare of Ontario Pension Plan ("HOOPP"). She normally files her tax returns on time through a tax preparation service. However, she filed her 2012 tax return on June 14, 2013, which was after the return's due date, and did not include any income from her T4A-Statement of Pension, Retirement Annuity and Other Income ("T4A"). The reason for this was because she had not received her T4A slip in the mail, which is how she was accustomed to receiving it. The tax preparation service who filed her return advised her that she could always file an amendment later, to include the missing income.
On January 20, 2014, the CRA reassessed Mrs. Shantakumar's 2012 return to include the unreported T4A income and levied omission penalties and a late penalty, all of which totaled almost $10,000. In response to the reassessment, on February 6, 2014, Mrs. Shantakumar visited the HOOPP office in person to obtain her T4A slip and then sent a letter to the CRA to request a reassessment of her 2012 tax return, including cancelation of the assessed penalties. Attached to the letter was a contact name and phone number from HOOPP, as evidence of her visit. In the letter, she also indicated keenness regarding paying her actual outstanding tax liability as soon as possible.
In May and July of 2014, the CRA notified the applicant there was a balance owing on her tax account and warned her that legal action could be taken to recover the balance. The garnishment of her wages was eventually commenced by the CRA.
Mrs. Shantakumar's taxpayer relief application underwent a first level review and was denied by the CRA. The reasons provided were: (1) her unreported income made up a significant portion of her total income, and (2) she could have estimated her unreported income and added an accompanying note advising the CRA accordingly.
Mrs. Shantakumar resubmitted a taxpayer relief application by way of a letter, explaining once more that HOOPP did not mail her T4A slip as usual but made it available online instead (given her age and profession, she was not proficient at the use of computers). She asserted she is otherwise a law abiding citizen, a registered nurse, and that she has always filed and paid her taxes. She also advised that she was embarassed her wages were being garnished and thus borrowed money to pay off her tax liability. She requested the garnishments of her wages thus cease.
After a second level review by the CRA of Mrs. Shantakumar's account, her taxpayer relief application was once again rejected. The CRA indicated its conclusion was based on a review of Mrs. Shantakumar's tax filing and payment history which entailed omitting income or three taxation years, and late remissions for six of the ten years examined. Mrs. Shantakumar also allowed interest to accrue and collection actions to commence to recover tax debts. The report also states that the debt from 2012 was repaid in full on July 18, 2017 by way of garnished wages and the taxpayer did not submit the additional income from the T4A on her own initiative, but rather that it was the CRA that had to initiate this process. It also states that the "General Income and Benefit Guide" explains what income is to be included on a return, and what should be done if the taxpayer is missing information, i.e. estimate the income and attach an explanatory note. The conclusion drawn was that Mrs. Shantakumar failed to prove that she did not report the T4A income due to circumstances beyond her control.
The Issue Examined by the Court: Reasonableness of the CRA's decision
The issue examined by the court in this case was whether denying Mrs. Shantakumar's request for relief of penalties was reasonable.
The Judge's Analysis and Conclusion
Justice Ahmed expressed that he was astounded that three CRA employees prepared or reviewed the second-level report and all of them concurred with it on the same day, because the review should have entailed the taxpayer's historical documentation which should support the facts relied upon by the CRA in establishing her tax history for the previous ten years. Perhaps as a result, it should not be surprising that Justice Ahmed found errors in the report, including: (1) the date of the second-level review predated the date of Mrs. Shantakumar's letter requesting a second-level review, (2) the notation that Mrs. Shantakumar paid her liability through the garnishment of her wages on July 18, 2017, when she actually paid off her entire debt by a payment made on September 27, 2017.
Justice Ahmed also pointed out that the CRA did not take into account Mrs. Shantakumar's specific circumstances in their report, i.e. that she was seventy years old, supporting a disabled husband and daughter, and that she was solely responsible for paying the bills. Based on a recent case law precedent, Justice Ahmed reminded the CRA that a failure to consider a taxpayer's submissions with respect to financial hardships constitutes a reviewable error. While the CRA advised that the reason these grounds were ignored was because Mrs. Shantakumar did not provide evidence of her circumstances, Justice Ahmed responded that they cannot ignore these types of grounds because evidence hasn't been submitted. Instead, the CRA should ask for evidence when these types of grounds are mentioned in a taxpayer relief application.
Justice Ahmed asserted that Mrs. Shantakumar did not evade tax, but rather, tried to resolve the matter through the third party which files her returns and then later with the CRA. Justice Ahmed also concluded that had the CRA considered the totality of Mrs. Shantakumar's situation and more accurately reviewed her tax history, it is possibly they could arrive at a different conclusion. Therefore, the CRA made a reviewable error that should be rectified upon redetermination.
Tax Tips: Taxpayer Relief Application
The CRA is very prone to making errors in their tax assessments and reassessments of tax returns and other submissions from taxpayers. This case is only one evident example that it even happens after more than one internal review involving numerous CRA officers. As experienced Canadian tax lawyers, we have spent most of our careers identifying these errors and, in turn, fighting the CRA. We continue to remind our society that the CRA must be corrected and held accountable for these types of errors. Most taxpayers therefore benefit from having a Canadian tax lawyer oversee their case.
Further, disadvantaged individuals filing taxpayer relief applications should be sure to include any human rights grounds or circumstances which exist, even if providing the appropriate evidence could be delayed. As our society continues to evolve in a manner where equality is an important consideration, our court system continues to place emphasis on these grounds, putting some pressure on the CRA to do the same. An experienced Canadian tax lawyer can help define these grounds accurately and effectively, and thus maximize a taxpayer's chances for success.
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