Date: 20000228
Docket: T-1775-98
Between:
DR. MARK SHERIDAN
Applicant
- and -
THE MINISTER OF NATIONAL REVENUE
Respondent
Heard at Regina, Saskatchewan on January 13, 2000.
Order delivered at Ottawa, Ontario on February 28, 2000.
REASONS FOR ORDER BY: Muldoon J.
Date: 20000228
Docket: T-1775-98
Between:
DR. MARK SHERIDAN
Applicant
- and -
THE MINISTER OF NATIONAL REVENUE
Respondent
REASONS FOR ORDER
Muldoon J.
[1] This is an application for judicial review, pursuant to section 18.1 of the Federal Court Act, S.C. 1990, Chap. 8, section 5 of a decision by Revenue Canada, in a letter dated August 10, 1998, refusing to cancel interest pursuant to subsection 220(3.1) of the Income Tax Act, S.C. 1991, Chap. 49, subsection 181(1). The applicant seeks an order setting aside the decision of the respondent and referring the matter back to the respondent for redetermination.
Facts
[2] This case was heard in Regina on January 13, 2000, and it proceeded on the basis of general agreement between the parties' respective counsel as to the facts. Counsels' words, as spoken, are recorded clearly in the transcript of the proceedings, pages 7 and 8 among others are typical:
| MR. FOLEY (for the applicant): They [transcripts of cross-examination on affidavits] have been filed with the record, ..., on the anticipation that the affidavits and the transcripts would all become part of the evidence in front of you. |
| THE COURT: And that is agreed by the two of you, is it? |
| MS. LEE (for the respondent): Yes. |
| ... |
| MR. FOLEY: I think, ...,that there is very few surprises that are going to come out of this case today. I think the narrow issue between my learned friend and I is a very narrow one and I think that the facts as my friend has said, the facts are important to get one into the case, but the precise detail of whether it was $140,000 committed or $100,000 committed or $80,000 committed really doesn't matter, is that fair? It doesn't give my client a step up, put it that way. |
| MS. LEE: I think it would depend on what view you take of the matter, ..., but I believe there is not a lot of dispute about the facts and I think that we are dealing with a fairly narrow issue. I don't mean to be evasive, it is just that as I say the facts which underpin the initial tax assessment are quite complicated and I have tried to acquaint myself with those facts simply as it may be of relevance to the Court, but for the most part we are dealing with forgiveness of interest and the considerations relevant to forgiveness of interest, and many of the facts surrounding the audit and the investment of Dr. Sheridan don't really play a large part. |
[3] The spirit of cooperation between the parties' counsels continues to be recorded in the transcript of proceedings along at least to mid page 12. It is much to be lauded.
[4] In 1986, the applicant subscribed for shares in Alexis Limited Partnership (ALP). In his 1986, 1987 and 1988 taxation years, the applicant claimed investment tax credits and partnership losses arising from his ALP investment. Revenue Canada soon began to suspect, however, that ALP was not a valid investment vehicle for the scientific and experimental field. On October 2, 1991, the respondent advised the applicant that, having completed an audit of ALP, it did not consider that the partnership's activities qualified it as a valid investment vehicle in the scientific research and experimental fields. It proposed, therefore, to disallow the applicant's ALP deductions and credits. Four sets of reassessments ensued.
[5] First, by way of notice of reassessment dated August 6, 1993, the applicant's 1989 taxation year was reassessed although nothing was amended in respect to the periods 1986 to 1988. In this reassessment, the respondent, in fact, allowed the various ALP deductions and credits and simply deemed the applicant's ALP shares to have been disposed. The respondent was, in essence, reassessing the applicant on the assumption that the ALP investment was valid, contrary to its October 1991 position, in case its 1991 position should later crumble. This is called a "protective" reassessment. The applicant paid to the respondent $46,000 in order to satisfy the reassessment. For its part, the respondent took a waiver in order that it might again reassess the applicant's 1989 taxation year. It would do so if the 1991 position ultimately proved successful. All of this was clearly explained to the applicant and his chartered accountant. Dr. Sheridan swears (applicant's record p. 10) he knew the first 1989 reassessment was a protective one, as did Mr. Horachek (applicant's record p. 58). Mr. Horachek (Dr. Sheridan's accountant) confirms (applicant's record p. 112) all of Dr. Sheridan's statements.
[6] Second, by way of two notices of reassessment dated January 5, 1995, the applicant's 1986 and 1988 taxation years were reassessed. This time, ALP credits and deductions claimed were disallowed, pursuant to the 1991 position, and the applicant found himself facing an increase in tax payable for the two years. Interest was charged on this amount and, together with the taxes then owing, totalled $207,000. The position on which these reassessments were based, of course, contradicted the respondent's stand taken in the reassessment of the applicant's 1989 taxation year in which tax was charged on the basis that ALP was a valid investment. The applicant filed two notices of objection with regard to these reassessments but they were partially dismissed in a decision dated July 16, 1996. Some interest relief was granted for amounts owing from the 1986 and 1988 taxation years pursuant to subsection 220(3.1) of the Income Tax Act.
[7] Third, by way of notice of reassessment dated November 12, 1996, the applicant"s 1989 taxation year was reassessed for a second time, the first reassessment being overturned and the applicant being credited with a total of $60,891. In effect, the respondent, now confident that its 1991 position vis à vis ALP was secure, revoked the protective reassessment of 1995 and reassessed, based on the 1991 position. Interest owing on the reassessed tax payable for the 1986 and 1988 taxation years, however, continued to be charged.
[8] The applicant requested, by way of letter dated April 23, 1997, that the November 12, 1996 decision be reconsidered, pursuant to subsection 220(3.1) of the Income Tax Act. In particular, the applicant requested that interest charged during the 1992 and 1993 taxation years and for the period June 30, 1994 to December 31, 1996 be cancelled. This request was considered but declined by way of letter dated August 7, 1997. A further request for reconsideration of this decision was turned down by letter dated April 22, 1998. The applicant filed an application for judicial review of the August 7, 1997 decision but discontinued it when the respondent finally agreed to reconsider the decision yet again, pursuant to subsection 220(3.1) of the Act.
[9] Representations articulated by counsel, in a letter tab N, at p. 65 were effective, it seems. One portion of counsel's letter on behalf of Dr. Sheridan, found on p. 69, runs thus:
| "Respecting the period dating from June 30th, 1994, to the present, at a minimum it is suggested that interest should not be charged prior to January 5th, 1995, as reassessments had not even been issued until that time". |
So, it hardly becomes the applicant, Dr. Sheridan to complain about the decision to forgive interest prior to January 5, 1995, when his counsel suggested it formally and emphatically. At "a minimum" does not dilute or repudiate the force of the suggestion.
[10] By letter dated August 10, 1998, interest charged during the 1992 and 1993 taxation years and for the period July 1, 1994 to January 5, 1995 was cancelled. Mr. Kevin Mannion, Acting Director of the respondent's Saskatoon Tax Services office, wrote:
| As you were not notified of the amount owing until January 5, 1995, and that the delay of such notification was beyond your control, I have determined that relief from interest charges in addition to what was previously granted is appropriate. |
| Your account will be adjusted to cancel interest for the period July 1, 1991 to June 29, 1993 and July 1, 1994 to January 5, 1995 with respect to the tax liability for the years 1986 and 1988. Once adjusted, interest will have been canceled [sic] for the entire period of June 30, 1989 to January 5, 1995. |
| I regret that I am unable to grant any additional relief. |
[11] This decision was based on a Fairness Package Recommendation Report written by Mr. Frank Metanchuk, an appeals officer with the Saskatoon Tax Services office, and dated August 6, 1998. A list of additional factors considered by Mr. Mannion can be found in his affidavit. In general, his decision not to give relief for the period January 5, 1995 to November 12, 1996 was based on his understanding that the applicant was aware of his outstanding tax liability during that period. As a result of the decision, the applicant continued to owe the respondent $53, 344. He filed an application for judicial review of the August 10, 1998 decision.
Legal Issues
[12] The applicant was charged interest pursuant to subsection 161(1) of the Income Tax Act, R.S.C. 1985, Chap.1 (5th Supplement). This subsection provides:
| 161(1) Where at any time after a taxpayer's balance-due day for a taxation year (a) the total of the taxpayer's taxes payable under this Part and Parts I.3, VI and VI.1 for the year exceeds |
| (b) the total of all amounts each of which is an amount paid at or before that time on account of the taxpayer's tax payable and applied as at that time by the Minister against the taxpayer 's liability for an amount payable under this Part or Part I.3, VI or VI.1 for the year, |
| the taxpayer shall pay to the Receiver General interest at the prescribed rate on the excess, computed for the period during which that excess is outstanding. |
[13] The partial interest relief given the applicant was allowed pursuant to subsection 220(3.1) of the Income Tax Act. This subsection provides:
| 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 a partnership. |
Despite being added to the Income Tax Act in 1991, the provision is applicable to interest charged in respect of all taxation years from 1985 onward.
[14] The applicant raised seven issues in his notice of application as to how the respondent erred in giving him only partial interest relief. Some of the issues were addressed in his memorandum of law, though, he effectively abandoned these or recharacterized them at the hearing of the matter. The ultimate question, nevertheless, remains clear: did the respondent err in applying subsection 220(3.1) of the Income Tax Act to the circumstances of the applicant? The applicant submitted at the hearing that the respondent did err in applying the provision to the period beginning January 5, 1995 by assuming that the applicant knew of his tax liability at that time. This error, the applicant argued, resulted from not considering three relevant matters.
[15] The first matter noted by the applicant concerns an audit which he alleges was ongoing on January 5, 1995. The second matter addressed, concerns the cancellation of interest which was going to occur if the respondent were to remain faithful to its position outlined in October of 1991. The third matter concerns the fact that the respondent"s first reassessment of the applicant"s 1989 taxation year, carried out on January 5, remained inconsistent with the respondent"s October, 1991 position until the second reassessment fixed this inconsistency on November 12, 1996.
[16] The respondent submits that the applicant and his chartered accountant knew exactly how much the applicant's tax liability was because it was written in several places, including his reassessment of January 5, 1995. The respondent adds that there was no audit involving the applicant which could have confused him on this matter. As for the fact that the reassessment was inconsistent with those of the 1986 and 1988 taxation years, the respondent submits that the applicant knew of the inconsistency, knew the reasons for it and knew that, as a protective reassessment, it would probably be amended.
[17] The respondent"s decision to provide interest relief under subsection 220(3.1) of the Income Tax Act is a discretionary one. This makes the Court reluctant to interfere with it, although, as with all such decisions, there are boundaries within which the discretion must be exercised. The decision-maker, for instance, must consider all relevant matters; Maple Lodge Farms Limited v. Government of Canada et al., [1982] 2 S.C.R. 2.
[18] To begin with, this Court will assume that the discretion to relieve a taxpayer of interest charged will be exercised positively when the interest has been accumulating on an amount which a taxpayer is unaware that he or she owes. Nothing was put before the Court, however, to suggest that ongoing audits, the potential for interest to be refunded and conflicting reassessments are relevant to considering interest relief. This Court does accept, nevertheless, that these are factors the existence of which may imply that a taxpayer was unaware of his or her tax liability. Unfortunately for the applicant, no such inferences can be drawn in the circumstances shown in the evidence.
[19] Whether an audit relevant to the applicant"s tax position was ongoing during the period of January, 1995 to November, 1996, is unclear. Mr. Mannion avers in his affidavit that one was not. The letter of the respondent dated October 2, 1991 also indicates that the ALP audit was completed prior to 1995. As the applicant noted, however, the Fairness Package Recommendation Report of Mr. Metanchuk does contain a reference to an ongoing ALP review as of March, 1995. This Court does not consider this unknown review, however, as evidence of an audit which could have cast any doubt on the calculations of the applicant"s first 1989 reassessment. Nor can such doubt have arisen simply because of the fact that it took until July of 1996 for the respondent to act on the results of the audit in respect of the applicant"s 1989 taxation year.
[20] As for the second matter, that of the interest which would be cancelled, this would not stop the taxpayer from knowing what he owed as of January 5, 1995. Nor could he be confused merely because the tax liability in question, arising from a protective reassessment, would eventually be reversed once the respondent was sure that its new position would not be appealed. That this was clear to him is equally clear to the Court in light of the applicant"s retaining a chartered accountant and his communications with the respondent. In the end, whatever counsel for the applicant may assert concerning the applicant"s status of accounts or his total tax liability (whatever that is) it is clear that, as of January 5, 1995, the applicant knew the amount of his tax liability for his 1989 taxation year. As counsel for the respondent noted, it was written right on the first reassessment. Perhaps every taxpayer dislikes or even resents being compelled to bear the expense of the general government. However, this Court cannot discern a reviewable error in the respondent's conduct herein.
Conclusion
[21] The applicant having failed to demonstrate an error in the respondent"s decision of August 10, 1998 refusing to cancel interest pursuant to subsection 220(3.1) of the Income Tax Act , his application is dismissed.
"F.C. Muldoon"
F.C. Muldoon
Ottawa, Ontario
February 28th, 2000