Date: 200100813
Docket: T-1915-99
Neutral Citation: 2001 FCT 876
BETWEEN:
JOHN HERBERT ROCKE ROBERTSON
Applicant
-and-
THE MINISTER OF NATIONAL REVENUE
Respondent
REASONS FOR JUDGMENT
LEMIEUX J.:
INTRODUCTION
[1] This is an application for judicial review, pursuant to section 18.1 of the Federal Court Act, of a decision of the Minister of National Revenue (hereinafter the "Minister"), pursuant to subsection 220(3.1) of the Income Tax Act (hereinafter the "Act"), denying Mr. Robertson's application for the waiver of penalties and interest otherwise payable under the Act for the 1993 to 1996 taxation years.
BACKGROUND
[2] The applicant is a lawyer practising in the areas of small business, wills and estates since 1966. He was a partner in the law firm of Ferguson Gifford from 1973 until 1994, when he retired for health concerns, economic and partnership problems. Since March 1999, he has practiced at the firm of Aydin Bird. Upon his retirement from the Ferguson-Gifford partnership he was required to include in his income a percentage of the work in progress[1], of the partnership which he states is deemed income. This was calculated at approximately $130,000.00.
[3] Mr. Robertson explains that although he received no money from the work in progress, he was allowed to spread the deemed income over a period of three years which resulted in taxable income of approximately $42,000 per year.
[4] On November 18, 1997, he submitted an application for relief under the Fairness Provisions of the Act. He outlines his hardship as follows:
Due to an anomaly in the Income Tax Act I have been taxed $43,792 for the year ended December 31, 1996 on income of $54,000.
. . .
Due to high taxes for 1995 I have borrowed to my limit and after borrowing $8,000 to apply to my 1996 income taxes I have no means of paying the outstanding balance at this time.
...
After a number of years of financial adversity, my law firm disintegrated, falling from 55 lawyers to 17 lawyers. I retired from the partnership in 1994 and in so doing triggered $127,914 in "work in progress" which is "deemed income" which is added to my taxable income. This is "phantom income" which I will never receive and which is an artificial creation of the Income Tax Act.
After borrowing to the limit of my ability, I have no means to pay the outstanding balance of income taxes at this time. In the summary of my assets is attached, you will see that I have substantial RRSPs, which should not be cashed because, having been self-employed, I have no other pension and could face a desperate situation in my old age. You will also see a capital account with the law firm Ferguson Gifford in the amount of approximately $112,000, which, unfortunately, is only a "paper asset" on which the partnership is obliged to pay me only $5,000 per year (and which may completely disappear if the law firm fails). The $5,000 is not paid to me in cash but is applied by Ferguson Gifford against the overhead which I pay them each year as an independent contract lawyer.
Unfortunately I also have other "phantom income", being deemed income on an Income Averaging Annuity Contract (which was used to spread a capital gain realized in 1981) and interest on my Ferguson-Gifford capital account which is credited to the account and not paid to me.
In previous years where taxes were significant and income was declining, I handled income taxes by selling my house (in 1994) and eliminating most of my other debt. By April 1997 I again borrowed to the extent of my ability in order to purchase a condominium (975 square feet) and to pay my income taxes. I have no further assets to sell.
I suffer from . . .problems, and I had intended by retiring from the partnership to limit my working time. Unfortunately I am forced to work full-time in order to earn an income of $54,000 (for 1994, 1995,1996). I do not expect that this income will change substantially in 1997. I have no other sources of income, nor do I have a life partner with a second income.
... While I have no remaining spousal financial obligations, I have been paying child maintenance for 20 years and I contribute additional money to my youngest daughter who is in full-time attendance at the University of Manitoba.
[5] The applicant wrote the Minister on June 2, 1998, September 30, 1998 and in December 1998, requesting an acknowledgement of his application.
[6] The respondent did not acknowledge receipt of the application until December 16, 1998. On February 3, 1999, the respondent denied the applicant's request under the fairness provision. The relevant passage of that decision is as follows:
Upon a thorough review of your financial situation, the Department is of the opinion that you are not in financial hardship. Therefore your request does not fall within the intent of the Fairness Legislation. [emphasis mine]
[7] Mr. Robertson wrote to the respondent on February 8, 1999 requesting a meeting to explain the details of his application. The respondent treated this letter as an appeal of the first level fairness decision and requested from the applicant two years of bank and credit card statements which he submitted on March 5, 1999.
[8] The respondent rendered its second level decision denying the appeal on April 27, 1999. The decision reads in part:
Your file was reviewed at an independent second level. I apologize for the delay in responding which was necessitated by a thorough review of your submission under the provisions of the Fairness Legislation.
Your application was based on two foundations. The first was that the penalties and interest charged to your account were as a result of circumstances beyond your control. The second basis was that of financial hardship. The Department's position on these issues follows below.
In your letter dated November 18, 1997, you stated that your tax debts were created as a result of an anomaly under the Income Tax Act. Please be advised that any person who disagrees with an assessment may file a Notice of Objection with the Minister of National Revenue. The Fairness Legislation provides for cancellation of interest and penalty charges incurred due to circumstances beyond an individual's control. The Department has found that the circumstances of your case were not beyond your control, as there was available, the recourse of filing an Appeal.
With regards to your claim of financial hardship, a review of your household income, expenses, assets and liabilities does not suggest the existence of hardship. The ability exists to repay the debt plus penalties and accrued interest as you have assets available for liquidation and discretionary monthly expenses that can be lowered to reduce your liabilities.
As for the time taken by the Department to review your submission at the first level of fairness, the Department may be prepared to cancel the interest charged to your account during this time. However, as with all fairness requests, any cancellation of penalty and/or interest is predicated upon the Department's acceptance of a proposal of a suitable schedule of payments [sic] to retire the tax portion of the debt. Unfortunately, as your application did not include a suitable schedule of payments towards the tax portion of you debt, the Department will not cancel any amounts at this time. [emphasis mine]
[9] On May 26, 1999, the applicant made another request for a meeting with the respondent to discuss his application. He was contacted by Mr. William Corden, a collections officer employed by the respondent. Although Mr. Corden informed the applicant that his application would receive no further consideration he agreed to meet with the applicant. During this meeting the applicant was advised that financial hardship would be indicated by an annual income of $17,570.
ISSUE
[10] Did the respondent discharge his duty to act fairly in declining to exercise his discretion under subsection 220(3.1) of the Act?
THE FAIRNESS PROCESS
[11] The affidavit submitted with the respondent's record outlines the decision-making process with respect to a Fairness Request. The relevant passages of the affidavit are as follows:
After receiving the CCRA's decision, the taxpayer may make a written "second level" Fairness request if he or she disagrees with the CCRA's decision at the first level.
The file is then assigned to a Collections Officer who was not involved at the "first level", whose role it to conduct a complete review of the file to date, including the taxpayer's request for Fairness relief. This officer prepares a further summary of the file, accompanied by his or her recommendation as to whether or not to approve or deny the taxpayer's Fairness request. The file and summary with recommendation are forwarded to a Fairness Committee comprised of a Collections Manager who was not involved at the "first level" and the Assistant Director, Revenue Collections, for a decision. [emphasis mine]
[12] It is acknowledged by the respondent that at the first level Mr. Robertson's waiver application was reviewed by a Collections Officer whose recommendation was concurred in by a Fairness Committee consisting of two Collections Managers: Diane Readman and Stan Thompson.
[13] At the second level, the summary and recommendations were forwarded to a Fairness Committee comprised of Mr. Vondette who was a Collections Manager and Stan Thompson who was Acting Assistant Director, Revenue Collections, both of whom concurred with the recommendation that the second level appeal should be denied.
LEGISLATION
[14] The relevant legislative provision is as follows:
(3.1) Waiver of penalty or interest
The Minister may at any time waive or cancel all or any portion of any penalty or interest otherwise payable under this Act by a taxpayer or partnership and, notwithstanding subsections 152(4) to (5), such assessment of the interest and penalties payable by the taxpayer or partnership shall be made as is necessary to take into account the cancellation of the penalty or interest.
DISCUSSION
[15] In Getson v. Canada (Attorney General), 2001 F.C.T. 550, I found the principles governing the exercise of ministerial power under subsection 220(3.1) of the Act were articulated by Pratte J.A. in Her Majesty the Queen v. Barbara L. Barron et al. (1997), 97 D.T.C. 5121 (F.C.A.) as follows:
... it may be useful to recall that subsection 152 (4.2) of the Income Tax Act confers a discretion on the Minister and that, when an application for judicial review is directed against a decision made in the exercise of a discretion, reviewing court is not called upon to exercise the discretion conferred on the person who made the decision. The court may intervene and set aside the discretionary decision under review only if that decision was made in bad faith, if its author clearly ignored some relevant facts or took into consideration irrelevant facts or if the decision is contrary to law.
[16] Accordingly, this Court cannot interfere with the Minister's decision unless a reviewable error was committed.
[17] It is my view, however, that the respondent breached the duty of fairness when it broke its own internal rules as to the composition of the second level appeal panel.
[18] The respondent contends that although Mr. Thompson was by circumstance in the position of acting Assistant Director, Revenue Collections, by the "second level" review, the independence of the review process was not nullified given that the request was considered by two Collections Officers and two other Managers in the course of the ordinary fairness review process.
[19] This argument cannot withstand scrutiny. The respondent has established specific procedures for assessing a Fairness Request. It is apparent that this procedure was designed to ensure that the same decision maker is not involved at both the first and the second level reviews. Notwithstanding this procedure, the respondent allowed Mr. Thompson to participate not only at the first level but also at the second level. Though Mr. Thompson held the position of "Acting" Assistant Director, rather than his substantive position of Collections Manager, I am satisfied that the respondent has not respected its own procedure. In Baker v. Canada (Minister of Citizenship and Immigration, [1999] 2 S.C.R. 817, Madam Justice L'Heureux-Dubé, in her analysis of criteria that enable a Court to determine whether procedures followed respected the duty of fairness, stated:
[T]he analysis of what procedures the duty of fairness requires should also take into account and respect the choices of procedure made by the agency itself, particularly when the statute leaves to the decision-maker the ability to choose its own procedures, or when the agency has an expertise in determining what procedures are appropriate in the circumstances: Brown and Evans, supra, at pp. 7-66 to 7-70. While this, of course, is not determinative, important weight must be given to the choice of procedures made by the agency itself and its institutional constraints: IWA v. Consolidated-Bathurst Packaging Ltd., [1990] 1 S.C.R. 282, per Gonthier J.
[20] In deciding whether to allow this judicial review application on this limited ground, I was influenced by the apparent purpose of the internal rule and the values which that rule was designed to convey to the public.
[21] The internal rule that was breached sought to assure the taxpayer that the appeal process was genuine and effective in that a person who had decided the waiver application at the first level could not sit on appeal from his/her decision.
[22] In addition, by setting up this procedure, while not quite meeting the requirements for the application of the doctrine of legitimate expectations, the respondent intended it be followed in order to promote its fairness policy.
[23] In terms of the relief sought, the applicant requested that if I allowed the judicial review application, I should direct the respondent to cancel penalties and interest or that I keep jurisdiction by requiring the respondent to report back to the Court after reconsideration was completed. I agree with the respondent that I do not have the ability to give the applicant this kind of relief.
[24] The applicant requested costs. He is not entitled to costs because he has not incurred them by retaining outside counsel. He is to be considered as a self-represented litigant (see Davidson v. Canada (Solicitor General), [1989] 2 F.C. 341 (C.A.). He is entitled to his disbursements.
[25] For all of these reasons, this judicial review application is allowed, the decision at the second level review is set aside. The matter is referred back for reconsideration at the second level by persons not previously involved in this matter. Since the applicant asserted, before the Court, many errors of fact and understanding in the second level review which is set aside, the applicant shall be given the opportunity to make written submissions to address those points without prejudice to the second level Fairness Committee to grant him an interview if it deems it desirable.
[26] This judicial review application is granted with disbursements only to the plaintiff.
"François Lemieux"
____________________ J U D G E
OTTAWA, ONTARIO
August 13, 2001
Date: 20010813
Docket: T-1915-99
OTTAWA, ONTARIO, MONDAY, AUGUST 13, 2001
Present: THE HONOURABLE MR. JUSTICE LEMIEUX
BETWEEN:
JOHN HERBERT ROCKE ROBERTSON
Applicant
-and-
THE MINISTER OF NATIONAL REVENUE
Respondent
ORDER
For the reasons given, this judicial review application is allowed, the decision at the second level review is set aside. The matter is referred back for reconsideration at the second level by persons not previously involved in this matter. Since the applicant asserted, before the Court, many errors of fact and understanding in the second level review which is set aside, the applicant shall be given the opportunity to make written submissions to address those points without prejudice to the second level Fairness Committee to grant him an interview if it deems it desirable.
[27] This judicial review application is granted with disbursements only to the plaintiff.
J U D G E
[1] Work in progress is an asset of the partnership to be billed and collected by the remaining partners. Applicant's Affidavit, Applicant's Record, Tab 3, p. 2