Federal Court Decisions

     T-2728-94

BETWEEN:

     MILDRED BILIDA, 2/3 BUSINESS PARTNER OF

     ARABIAN GARDENS STABLES, CHARDON, OHIO

     WITH MY SON RONN BILIDA

     Applicant

     - and -

     REVENUE CANADA

     HON. MINISTER OF NATIONAL REVENUE

     Respondent

     REASONS FOR ORDER

JEROME, A.C.J.:

     This is an application for judicial review of the decision of the Chief of Appeals not to waive interest assessed with respect to the applicant's 1986, 1987, 1988 and 1989 taxation years. At the conclusion of argument in Toronto, Ontario, on October 8, 1996, I took the matter under reserve and indicated that written reasons would follow.

     Mrs. Bilida is a seventy-six year old widow and a retired real estate agent. In 1965 she and her husband started an Arabian horse farm business which was eventually taken over by their son, Ronn Bilida. In 1979, he moved the operation to Kentucky, U.S.A. and two years later moved to Chardon, Ohio. Ronn Bilida operated the Ohio farm in partnership with the applicant and her husband, each of them holding a one-third interest in the farm. After her husband died in 1983, the applicant inherited his one-third interest and became more involved in the farm operation. In addition to her financial contribution, she assisted her son with all sales promotions and was involved in the planning of future endeavours.

     During the relevant taxation years, the applicant retained Bennett Gold, Chartered Accountants to prepare her tax returns. On the advice of her accountant, Mrs. Bilida claimed her two-third share of the farm losses against her real estate income.

     On September 12, 1988, Revenue Canada issued an assessment of the applicant's 1987 income tax return. The assessment disallowed restricted farm losses of other years and revised her taxable income to $23,175.00 resulting in net federal taxes payable of $4,484.40 and net provincial taxes payable of $2,176.90. Interest was added to the arrears in the amount of $131.73. This was the first indication Mrs. Bilida had received from Revenue Canada that she might not be entitled to claim farm losses, although she had done so since 1981. On December 8, 1988, the applicant's accountant filed a Notice of Objection regarding the assessment of her 1987 tax return.

     Revenue Canada subsequently advised the applicant by letter dated January 25, 1990, that it had completed a review of her farming operation and farm losses and non-capital losses claimed in 1986, 1987 and 1988. Since the losses were not considered to have arisen through the carrying on of a farming operation as a business with a reasonable expectation of profit, they were disallowed.

     Mrs. Bilida wrote to Revenue Canada on February 5, 1990, providing it with more information regarding the farm operation and her involvement in it. She requested that it reconsider granting full allowances for the farm losses claimed. She subsequently met with Revenue Canada officials to discuss her tax returns. However, the department confirmed its assessment and advised the applicant that it would be reassessing her returns as it had proposed in its letter of January 25, 1990. Thereafter, the department issued assessments of the applicant's 1986, 1988 and 1989 tax returns informing her that she owed $41,992.99 in arrears, penalties and interest.

     Mrs. Bilida's accountant referred her to a tax litigator who filed a Notice of Objection on her behalf. However, the applicant was not able to pay the solicitor's fees and could not retain him to continue to act on her behalf.

     The applicant did not have any savings with which to pay Revenue Canada since she had liquidated all her RRSP's and GIC's in 1988 in order to purchase a house located at 826 Castlegrove Avenue in Oshawa, Ontario. The property was intended to be an investment for her retirement years. The purchase price of that home was $170,000.00. Mrs. Bilida used her savings of $30,000.00 as a down payment and took a mortgage for the remaining $140,000.00. As a result, in order to pay Revenue Canada the arrears, interest and penalties owed, the applicant was forced to sell her townhouse located at 30-220 Ormand Drive, Oshawa. As the arrears were due immediately, the applicant also borrowed approximately $64,000.00 from her brother on the condition she would repay him as soon as she was able to sell the townhouse.

     Mrs. Bilida did not sell the house on Castlegrove Drive because her daughter and her family were living there. Sometime after the applicant had purchased the house, her daughter, who has two children, one with Down's Syndrome and special needs, was divorced. Her daughter could not afford to rent a house so the applicant allowed her and her children to move into the house on Castlegove. When Mrs. Bilida received the reassessment from Revenue Canada, she decided the best course of action would be to sell her townhouse and have her daughter and grandchildren live with her in the larger house on Castlegove.

     The applicant had hoped to sell her townhouse for $140,000.00 but the real estate marked dropped rapidly. After two years on the market, the property sold for only $92,000.00. Mrs. Bilida repaid her brother and was left with less than $28,000.00. Nevertheless, she paid all of the arrears, penalties and interest owing to Revenue Canada as they came due.

     In February of 1994, the applicant learned about "The Fairness Package Legislation" and on March 2, 1994, wrote to the Minister of Revenue seeking relief under the new legislation. When she received no response, she again wrote to the Minister in May of 1994 asking for a review of the reassessments of her income tax and relief from the interest she had paid. On July 21, 1994, she wrote to Mr. Michael R. Rose, Chief of Appeals, asking for an extension of time in which to serve a Notice of Objection regarding her income tax assessments. She advised Mr. Rose that she had started to get some help from a lawyer but had been unable to pay his fees. The applicant also told Mr. Rose that she had been required to sell her town house in order to pay Revenue Canada. Mrs. Bilida also requested a review of the reassessments of her 1986, 1987, 1988 and 1989 tax years. She advised the Minister that she did not have the resources for either a lawyer or court costs.

     When she did not receive a response from the department, the applicant again wrote on September 7, 16 and 28, 1994, seeking relief from the payment of interest and penalties on arrears under "The Fairness Package Legislation". On September 21, 1994, Mr. Rose advised the applicant of his decision not to cancel interest charged with respect to her 1986, 1987, 1988 and 1989 tax returns.

     The applicant now seeks to have that decision set aside on the grounds that the Minister failed to consider the economic hardship caused by the arrears, penalties and interest and her inability to pay; failed to consider the delay by Revenue Canada in assessing her tax returns; and, failed to take into account her history of compliance with the Income Tax Act.     

     Subsection 220(3.1) of the Income Tax Act provides as follows:

220. (3.1) 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 subsection 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.

     In Kaiser v. Minister of National Revenue, [1995] D.T.C. 5187, Rouleau J., made the following comments with respect to the legislation at p. 5188:

The purpose of this legislative provision is to allow Revenue Canada, Taxation to administer the tax system more fairly, by allowing for the application of common sense in dealing with taxpayers who, because of personal misfortune or circumstances beyond their control are unable to meet deadlines or comply with rules under the tax system. The language used in this section bestows a wide discretion on the Minister to waive or cancel interest at any time.

     In order to assist in the exercise of that discretion, the Minister has implemented guidelines to be followed in applying the legislation. Information Circular 92-2 outlines the three circumstances where cancelling or waiving interest or penalties may be warranted:

(i) extraordinary circumstances such as a disaster or disruption of services beyond a taxpayer's control that may have prevented a taxpayer from making a payment when due or otherwise complying with the Income Tax Act;

(ii) where the interest or penalty arose primarily because of actions of Revenue Canada including delay; and,

(iii) where there is an inability to pay the amounts owing.

     Paragraph 10 of the Information Circular reads:

10. The following factors will be considered when determining whether or not the Department will cancel or waive interest or penalties:

(a) whether or not the taxpayer or employer has a history of compliance with tax obligations;

(b) whether or not the taxpayer or employer has knowingly allowed a balance to exist upon which arrears interest has accrued;

(c) whether or not the taxpayer or employer has exercised a reasonable amount of care and has not been negligent or careless in conducting their affairs under the self-assessment system;

(d) whether or not the taxpayer or employer has acted quickly to remedy any delay or omission.

     Based on the evidence here, I am not satisfied that there has been a proper exercise of the statutory discretion bestowed on the Minister by subsection 220(3.1) of the Act. A discretionary power of this nature must be exercised in good faith, in accordance with the principles of natural justice, taking into account all relevant considerations and without regard to irrelevant or extraneous ones. As stated in Kaiser, supra, at pp. 5188-9:

Every case is required to be decided on its own merit in order that circumstances unique to that individual taxpayer are properly taken into account . . . [W]hen the Minister exercises his discretion under subsection 220(3.1), he is required to take into account considerations relevant and unique to that taxpayer alone.

     In the present case, it appears that the decision not to waive the interest charges was made without regard to the department's own guidelines and Mrs. Bilida's particular circumstances.

     First, there has been no consideration given to the applicant's inability to pay the amounts in question. Mrs. Bilida is a seventy-six year old widow. Her sole sources of income are the Old Age Pension and the Canada Pension Plan which amount to less than $900.00 per month. During the relevant taxation years, her income from real estate commissions was declining. In 1990, she earned commissions in the amount of $9,644.56 and incurred employment expenses in the amount of $4,387.00 resulting in employment income of $5,257.56. This was the same year she received reassessments from Revenue Canada advising her that she owed $41,992.99 in arrears, penalties and interest, which forced her to sell her townhouse and borrow money from her brother.

     As the applicant entered her retirement years and her potential to earn income from real estate sales declined, she took steps to provide for security in her old age. She made decisions about her retirement years based on the information she had regarding her financial situation. At the time she was making these decisions, she was not aware of any issue regarding her ability to claim farming losses or that she would eventually be reassessed and owe arrears, penalties and interest.     

     Furthermore, the evidence demonstrates that Revenue Canada's delay in assessing the applicant's tax returns has contributed to the accumulation of arrears, penalties and interest. Mrs. Bilida retained a tax accountant to prepare her tax returns and on his advice, had been claiming farm losses against her other income since 1981. However, it was not until September 12, 1988, seven years later, that Revenue Canada gave some indication that the losses would not be allowed. Two years after that, in September of 1990, the department finally advised the applicant that she owed $41,982.99, including $10,892.14 in interest.

     Accordingly, the applicant began claiming her two-third share of farm losses against her other income as early as 1981. She relied on Revenue Canada' review of her self assessments and continued this practice until she was assessed in 1990. Had she been advised by the department in a more timely manner that her claim for farm losses would not be allowed, she would have stopped claiming the losses against her income thereby preventing further arrears and accruing interest. I cannot see that any of these factors were taken into consideration by the Minister in refusing to exercise the discretion to waive interest and arrears under subsection 220(3.1).

     Finally, there is no indication that the department took into account any of the considerations outlined in paragraph 10 of its own guidelines. Specifically, no consideration was given to the fact that Mrs. Bilida has a history of compliance with her tax obligations. She has consistently filed her income tax returns on time and has paid all taxes, penalties and interest as soon as she was advised there were amounts outstanding. In conducting her affairs, the applicant retained and paid a tax accountant to prepare her income tax returns and relied upon his advice. She must be considered, therefore, to have made every reasonable effort to ensure that she was in compliance with the provisions of the Income Tax Act.

     For these reasons, the decision of the Chief of Appeals is set aside. The matter is referred back for reconsideration with directions that the Minister is to consider the guidelines outlined in Information Circular 92-2, in particular Revenue Canada's delay in assessing the applicant, her inability to pay the arrears, penalties and interest, and the applicant's history of compliance with her tax obligations.

O T T A W A

December 18, 1996                      "James A. Jerome"

                             A.C.J.