Two taxpayers, Mr. Born Yesterday and his wife, Ms. Hopelessly Naïve, became your clients two years ago. Previously, they had used the services of a tax advisor, Mr. Artful Dodger. Dodger had introduced Yesterday and Naïve to certain investments which he assured them would save them a bundle of taxes.
Along came the CRA. Two nice gentlemen from the CRA reviewed the tax returns of Yesterday and Naïve and concluded that they had participated in a fraudulent tax scheme. The CRA reassessed the couple all the way back to 2012 and applied a gross negligence penalty and a pile of interest.
Yesterday and Naïve panicked. They dropped Dodger and came to you. You have negotiated with the CRA. You persuaded the CRA to withdraw the gross negligence penalties in return for an agreement to accept the CRA's reassessment for years after the expiry of the relevant normal reassessment periods.
Immediately after having been retained, you diligently applied for taxpayer relief in respect to the interest charges. For two years, the CRA has subjected you to a never-ending series of questions. Answering those questions has gobbled up your time. You have gone through a first level of administrative review and a second level of administrative review.
Recently, you received a one-page letter from the CRA. It has now completed the second level of administrative review. It is denying relief with respect of the interest. It contains some language, which you find difficult to make sense of, which purports to explain its reasoning. The interest claimed by the CRA exceeds the taxes owing by your clients. You understand that the Income Tax Act ("ITA") does not provide a mechanism for appealing taxpayer relief decisions. What can your clients do?
The clients can apply to the Federal Court for a judicial review of the CRA's decision to not grant interest relief. A judicial review is not an appeal. In a judicial review the court determines whether the CRA's decision was reasonable. The court does not determine how it would have decided the matter and substitute its decision for the decision made by the CRA. If the court decides that the CRA's decision was not reasonable, it will refer the matter back to the CRA for it to be redetermined by a CRA officer (the "New CRA Officer") other than the one who made the original decision. The New CRA Officer will hopefully pay some attention to the comments made by the court when sending the matter back to the CRA for redetermination.
The Federal Court has jurisdiction to conduct judicial review of entities, including specialized administrative tribunals and boards, in addition to the CRA. I shall refer to the CRA and the specialized administrative boards and tribunals collectively as "Subordinate Entities". The jurisprudence regarding judicial review of decisions of subordinate entities forms a body of law which lawyers refer to as Administrative Law.
One of the branches of Administrative Law deals with the considerations which a court should take into account when deciding whether a decision made by a Subordinate Entity, such as the CRA, is reasonable. In a 2019 decision, Canada (Minister of Citizenship and Immigration) v. Vavilov 2019 SCC 65, the Supreme Court of Canada commented extensively on this issue.
Two recent decisions have applied Vavilov in judicial reviews of decisions made by the CRA.
Belchetz v. Canada, 2020 FCA 225
Belchetz v. Canada (National Revenue), 2020 FCA 225 involved subsection 230(3.1) and a request for further interest relief after three different reviews at the CRA. The underlying situation dated back to an investment in what was ultimately a fraudulent scheme in the mid-1980s. In 2004, before interest relief was limited to 10 years, the taxpayers had submitted interest relief requests to the CRA. The first administrative review granted relief for certain time periods due to CRA delay. The taxpayers appealed and were granted some additional relief in the second administrative review. The taxpayers filed an initial application for judicial review which was settled on the basis that there would be a third administrative review by the CRA. When the CRA did not grant any additional interest relief in the third administrative review, the taxpayers sought judicial review of the CRA's decision.
The taxpayers request for judicial review was focused on interest relief for the time period beginning on the filing deadline for each year in question and ending many years later when the CRA finally issued its assessment. The CRA officer (the "Delegate") who completed the third administrative review had rejected this request. One basis was that the taxpayers had received a letter indicating that the CRA was reviewing the limited partnerships in which they had participated. The CRA letter also indicated that the taxpayers could proceed to have their returns processed without the deductions from the limited partnerships. The taxpayers had not taken that option and the Delegate found that accrual of interest in this period was in the taxpayers' control as a result of the option to proceed without the deductions. The Federal Court found this decision reasonable. The taxpayers appealed to the Federal Court of Appeal ("FCA").
The FCA summarized the history and prior decisions and turned to the standard of review. The FCA referred to earlier cases which found that the unstructured nature of the Minster's discretion under subsection 230(3.1) suggests that the courts should not subject such decisions to strict scrutiny.
The FCA also summarized prior jurisprudence confirming that the court can intervene when a decision was based on an incorrect finding of fact. The CRA must take all relevant considerations into account and genuinely exercise discretion.
Taxpayer's seeking judicial review of CRA exercises of discretion often argue that the delegate who made the decision improperly fettered their discretion through excessive reliance on the CRA guidance on taxpayer relief. However, in this case, the taxpayers argued that the delegate had improperly ignored a portion of CRA Information Circular 07-1R1, "Taxpayer Relief Provisions" dealing with interest relief for CRA delay. They also argued that while they knew the CRA was reviewing the situation they did not know how much tax was owing. The taxpayers asserted that it was unfair for them to have been charged interest for the period before they had been told how much tax was owing. The delegate had considered and addressed these arguments. Ultimately, the FCA found that the CRA's decision was reasonable.
Belchetz illustrates the process and difficulties taxpayers face in seeking judicial review of CRA decisions.
Ifi v. Canada, 2020 FC 1150
An example of a recent judicial relief decision where the taxpayer was successful is Ifi v. Canada (Attorney General), 2020 FC 1150. That case involves section 207.6 of the ITA. The taxpayer had an excessive TFSA contribution in 2009 which she corrected when the CRA informed her of the problem. In 2010, she left Canada and became a non-resident. She continued to contribute to her TFSA while a non-resident and apparently received advice from a Canadian financial institution that this was permitted. In 2014, she made a more substantial contribution to her TFSA which gave rise to most of the tax consequences. In 2018, she learned that she had been given incorrect advice and that she was not permitted to contribute as a non-resident. When she learned her contributions were not eligible because she was a non-resident, she closed her TFSA and submitted a request for relief.
The first request for relief was rejected on the basis that she had been warned about excess contributions after the excess contribution in 2009. The second administrative review agreed with the first though the taxpayer had pointed out that the 2009 error addressed in the letter related to the contribution limits of a Canadian resident while the second error related to the eligibility of a non-resident to contribute to a TFSA.
The Federal Court confirmed that the standard of review is reasonableness and summarized key points regarding reasonableness from Vavilov. The FC turned to its review of the situation at hand and found that the decision was not reasonable. The FC observed that the reasons given did not contain analysis that could lead from the evidence to the final determination. The decision letter after the second administrative review referred to continued excess contributions when that characterization was not accurate. The FC also identified the failure to recognize the difference between the 2009 error and the later error as unreasonable. The warning regarding 2009 addressed an excess contribution as a resident which was different than the contribution as a non-resident which occurred in later years. The second administrative decision did not address this. The second administrative review also appeared to lack independence from the first one and provided essentially the same reasons. Since the FC found the second administrative decision unreasonable, it referred the matter back to the CRA for reconsideration.
These two cases illustrate the scope of judicial review in a tax context. That scope can be quite narrow. To succeed, a taxpayer needs to be able to point to something that makes the CRA's decisions unreasonable under Administrative Law principles. This could include failure to consider a relevant factor or factual error. Taxpayers and their advisors should take great care when preparing judicial review applications.
A version of this article originally appeared in Tax Topics published by Wolters Kluwer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.