Ottawa, Ontario, July 11, 2006
PRESENT: The Honourable Mr. Justice Harrington
BETWEEN:
and
REVENUE AGENCY
REASONS FOR ORDER AND ORDER
[1] The Income Tax Act may be strict, but it does not penalize those who file their returns on time and does not charge interest on taxes paid on time. This point has not been grasped by Joanne Gandy, a self-represented litigant, who seeks judicial review of a decision made on behalf of the Minister of National Revenue not to exercise discretion to waive a late filing penalty and arrears interest on tax owing with respect to a return, with payment, both of which she insists were made on time.
[2] Ms. Gandy was disorganized, confused, and ill prepared. She certainly would have benefited from legal advice. This is her story as best I can understand it.
[3] Ms. Gandy is in the habit of filing her tax returns on time. She has used the same accountant since 1989. As a result of a tax audit in 2004 of a company with which she is associated, she and her accountant came to realize that Canada Customs and Revenue Agency (CCRA) had not recorded the fact that she had filed her 2001 tax return. The return was promptly filed, or re-filed, as the case may be.
[4] The record is full of allegations by Ms. Gandy and her accountant that the 2001 return was filed on time in the spring of 2002, but the details are very slippery indeed. At times it was said that the return was mailed, and at other times it was filed electronically. There is no evidence to support either assertion.
[5] Once the 2001 return was filed, or, as Ms. Gandy would have it, re-filed, she was issued a Notice of Assessment in September 2004. The notice indicates no changes from the return as filed. Net tax and Canada Pension Plan contributions payable were stated to be $9,426.79. In the explanation portion of the notice, CCRA said it assessed her a late filing penalty of $4,713.40 being 50% of unpaid taxes as of 15 June 2002 as well as arrears interest of $2,539.92, which interest would be compounded daily at the prescribed rate.
[6] Ms. Gandy does not appear to have contested this assessment. Rather, she asked the Minister to exercise his discretion pursuant to the Act and the Fairness Package Guidelines, on which more will be said, to waive the interest and penalty because they were excessive and caused her financial hardship. She alleged, and there is nothing in the record to contradict her, that apart from confusion with respect to the 2001 return, she has always filed her returns on time. As a single mother with two teenage children, the penalty and interest made things very difficult for her. Her request was rejected. She took the matter to the next level contemplated by the Guidelines which was a review by the director of the district office. He also refused to waive the penalty and interest. She managed to borrow money from a bank, paid all her tax liabilities in full, and then sought judicial review in this Court.
[7] During the hearing, I pointed out to Ms. Gandy that apart from whether or not the return was sent by mail, or electronically, the return indicated a tax payable of $9,426.79. Had she paid it? She said she had by one or more cheques and should have cancelled cheques to prove it.
JURISDICTION OF THE FEDERAL COURT
[8] It must be emphasized for Ms. Gandy's benefit that the Federal Court is quite distinct from the Tax Court of Canada. The Federal Court has jurisdiction to review administrative decisions of federal boards and tribunals, including those of the Minister himself and the entire CCRA. In accordance with Sections 18 and 18.1 of the Federal Courts Act, it has jurisdiction to review the decision not to waive the imposed penalty and arrears interest. However, it does not have jurisdiction to review the assessment itself. The case law was summarized by Prothonotary Morneau in Beaudry v. Canada(Customs and Revenue Agency) 2001 FCT 1347, (2001), 215 F.T.R. 18.
[9] If the assessment is in error because in fact the return was filed and the tax owing paid on time, or if they were not, but the amount of the penalty was wrongly determined, Ms. Gandy may object to the assessment, and if unsuccessful appeal up to the Tax Court of Canada, provided of course she is not out of time.
[10] The second assessment issue is the amount of the late filing penalty, 50% of the tax due. CCRA did not explain in the notice how it had arrived at that figure. However, and as set out in the record, the penalty was imposed pursuant to Section 162(2) of the Income Tax Act which is applicable to persons who fail to file a return and on whom a demand for a return was served personally or by registered letter. Ms. Gandy's assertion that she only came to learn of the problem during the course of the audit of her company is inconsistent with her having been served with a demand to file a return. The maximum penalty for simple failure to file a return, as set out in Section 162(1) of the Act, is 17% of the tax payable, not 50%. As mentioned above, if the assessment is wrong it is not up to this Court to make it right.
[11] However, should she be beyond the normal delays to file an objection or to seek an extension of time, there is another part of the Fairness Package legislation she may invoke. Section 152(4.2) of the Act gives the Minister the discretion to grant relief in order to reduce tax payable even though the normal deadlines for assessing have expired. If the Minister refuses to exercise his discretion to reopen the 2001 tax year, that decision may be the subject of a new and different judicial review before this Court (Maloshicky v. Canada(Customs and Revenue Agency) 2005 FC 978, [2005] 4 C.T.C. 12.
[12] Having said all that, the finding of CCRA that the return was not filed because of an error on the part of Ms. Gandy or her accountant was reasonable. This judicial review shall proceed on that basis.
THE DECISION UNDER REVIEW
[13] The decision under review is that of the assistant director, Revenue collections, Calgary Tax Services Office, dated 24 August 2005 and addressed to Ms. Gandy's accountant. As it is brief, I set it out in full:
"A detailed review of the file by senior officers of the Agency has determined that it would not be appropriate to cancel any of the penalties or interest in this instance. The circumstances described in your request do not fall within the guidelines outlined in Information Circular 92-2.
It is the responsibility of an individual to ensure that returns are filed and received by the Agency on or before the due date. There are no provisions in the Fairness guidelines for granting the cancellation of penalties and interest because of error on the part of an individual or representative.
As well, financial hardship for an individual client refers to financial suffering or the lack of what is needed to provide basic living requirements such as food, clothing, shelter, and reasonable non-essentials. A careful review of the information provided fails to verify that there is no ability to pay the accrued interest, especially in that the client has secured financing to pay off the entire balance owing, including the penalty and interest amounts.
As there is no evidence of financial hardship, and there were no circumstances beyond the client's control that prevented the timely filing of the 2001 tax return, I am unable to cancel the penalties or interest in this instance."
STANDARD OF REVIEW
[14] The decision is to be reviewed in accordance with the general administrative law standards enunciated on many occasions by the Supreme Court of Canada, and in accordance with Section 18.1(4) of the Federal Courts Act.
[15] In accordance with the principles summarized in such cases as Dr. Q v. College of Physicians and Surgeons of British Columbia, [2003] 1 S.C.R. 226, and Law Society of New Brunswick v. Ryan, [2003] 1 S.C.R. 247, the Court must take a functional and pragmatic approach in its review of a decision of an administrative board or tribunal. In general, an error in law is entitled to no deference, while other findings should only be disturbed only if they were unreasonable or patently unreasonable. Discretionary decisions are entitled to considerable deference. The Federal Court of Appeal has held in such cases as Lanno v. Canada (Customs and Revenue Agency) 2005 FCA 153, [2005] 2 C.T.C. 327, and Nail Centre and Esthetics Salon v. Canada (Customs and Revenue Agency) 2005 FCA 166, (2005), 335 N.R. 178, that the applicable standard in reviewing a decision on behalf of the Minister not to exercise discretion to waive penalty and interest is reasonableness. As per Ryan, supra, at paragraph 48:
¶ 48 Where the pragmatic and functional approach leads to the conclusion that the appropriate standard is reasonableness simpliciter, a court must not interfere unless the party seeking review has positively shown that the decision was unreasonable (see Southam, supra, at para. 61). In Southam, at para. 56, the Court described the standard of reasonableness simpliciter:
An unreasonable decision is one that, in the main, is not supported by any reasons that can stand up to a somewhat probing examination. Accordingly, a court reviewing a conclusion on the reasonableness standard must look to see whether any reasons support it. [Emphasis added.]
[16] However, the Federal Court of Appeal has also pointed out that the standard of review must be customized to suit the facts and issues of each particular case. In Sketchley v. Canada(Attorney General) 2005 FCA 404, (2005) 344 N.R. 257, Mr. Justice Linden held:
"...one cannot conclude that because a particular standard was found in a [particular] ...case to apply ... [the] same standard can be assumed necessarily to apply when reviewing another decision ... under the same legislative provision." (para. 51)
"The factors included within the pragmatic and functional approach are case-specific in nature, and the Supreme Court of Canada has stressed the importance of not applying the approach "mechanically" or as "an empty ritual" (Dr. Q, para. 26)." (para. 50)
[17] Section 18.1(4(c)) of the Federal Courts Act is also most important because it allows the Federal Court to grant relief if satisfied that "the federal board, commission or other tribunal erred in law in making a decision or an order, whether or not the error appears on the face of the record."
DISCUSSION
[18] The Income Tax Act was amended in the early 1990s to give the Minister some discretion to grant relief from the rigours of the Act. These amendments, popularly coined the "Fairness Package" led to the publication of various guidelines. Section 220(3.1) of the Income Tax Act is the legislative provision in issue in this case. It provides:
| (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 subsections 152(4) to 152(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.
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(3.1) Le ministre peut, à tout moment, renoncer à tout ou partie de quelque pénalité ou intérêt payable par ailleurs par un contribuable ou une société de personnes en application de la présente loi, ou l'annuler en tout ou en partie. Malgré les paragraphes 152(4) à (5), le ministre établit les cotisations voulues concernant les intérêts et pénalités payables par le contribuable ou la société de personnes pour tenir compte de pareille annulation.
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[19] On 18 March 1992, CCRA issued Information Circular IC-92-2 titled "Guidelines for the Cancellation and Waiver of Interest and Penalties". It specifically says, "This are only guidelines, they are not intended to be exhaustive, and are not meant to restrict the spirit or intent of the legislation". That statement accurately reflects the fact that a guideline does not have the force of law. It is not binding. The decision-maker erred in law by refusing to consider exercising his discretion on the grounds that a penalty cannot be waived if the late filing is attributable to error on the part of the taxpayer. Section 220(3.1) of the Act does not limit the Minister's discretion in that way, and, for that matter, neither do the Guidelines themselves. That fettering of discretion was the first reviewable error.
[20] Furthermore, even if one were to take the Guidelines as the equivalent of a regulation, which they surely are not, they were misunderstood by the decision-maker. The interpretation given was unreasonable. Section 5, in the "Guidelines and Examples..." portion provides "penalties and interest may be waived or cancelled in whole or in part where they result in circumstances beyond a taxpayer's or employer's control." The decision-maker has taken this to mean that it is a condition precedent to the exercise of discretion that the failure to file was caused by circumstances beyond the Ms. Gandy's control, a "force majeure". An error on her part in not filing is certainly not a "force majeure".
[21] However, the Guidelines have to be read as a whole including Sections 9 and 10 thereof found in the portion entitled "Requests for Cancelling or Waiving Interest and Penalties". The taxpayer is called upon in Section 9 to state why the interest or penalties levied "were primarily caused by factors beyond [her] control" (emphasis added). Thus, the force majeure factor has been reduced from being the sole factor to the primary factor.
[22] Moreover, Section 10 provides:
| 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.
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10. Le Ministère tiendra compte des points suivants dans l'étude des demandes d'annulation des intérêts ou des pénalités ou de renonciation à ceux-ci :
a) si le contribuable ou l'employeur a respecté, par le passé, ses obligations fiscales;
b) si le contribuable ou l'employeur a, en connaissance de cause, laissé subsister un solde en souffrance qui a engendré des intérêts sur arriérés;
c) si le contribuable ou l'employeur a fait des efforts raisonnables et s'il n'a pas fait preuve de négligence ni d'imprudence dans la conduite de ses affaires en vertu du régime d'autocotisation;
d) si le contribuable ou l'employeur a agi avec diligence pour remédier à tout retard ou à toute omission.
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This section does not say that these four factors are only considered when force majeure is the sole or primary factor. They are always to be considered.
[23] The second reviewable error therefore is that the assistant director failed to consider the four factors enumerated in Section 10. As to whether Ms. Gandy knowingly allowed a balance to exist, there is no finding of fact for this Court to review. She was in lengthy correspondence trying to figure out exactly how much was due. There was some confusion on CCRA's part with respect to her 2002 return, which took some time to clear up. Once the total amount owing on all her tax years was ascertained, she borrowed the money. She claims she would have borrowed sooner, but the bank required a precise amount. It is not clear whether that fact had been asserted before the fairness assessment officer. As to whether she was negligent or careless, no analysis was done as to the reasonableness of her belief that she had in fact filed her return. There is no evidence to contradict her assertion that hers is a history of compliance.
[24] The third reviewable error arises from the concept of "hardship". The decision-maker was not satisfied that there was hardship "...especially in that the client has secured financing to pay off the entire balance owing, including the penalty and the interest amounts." According to the notes in the record, as of 29 September 2005, the total balance owing, including for the 2003 tax year, was $25,269.58. The penalty and interest on the 2001 tax year had by then mounted to $8,137.71, plus of course the original tax of $9,426.79.
[25] As held in Nail Centre, supra, an essential element of the fairness determination involves a calculation of the taxpayer's indebtedness to CCRA. It is wrong simply to consider the amount of interest and penalties, without also taking into account the amount of tax owing. As stated by Mr. Justice Evans at paragraph 8:
"...Since no reasonable determination of hardship can be made without considering a taxpayer's total indebtedness to the CCRA, the Minister erred, in our view, by failing to take into account the amount owed by the appellants in taxes."
[26] Ms. Gandy was asked to prepare a monthly income and expense statement and a net worth statement. She claimed her house was worth $153,000 against which there was $96,000 mortgage. On a monthly basis, she showed income in excess of expenses of $360.00. However, she did not take into account her tax liabilities, and this was before her personal loan of about $25,000. Even assuming interest at only the legal rate of 5%, and not taking into account that the bank may well have required blended payments of principal and interest, it would cost her more than $100 a month simply to service the loan.
[27] The fact that Ms. Gandy was able to borrow money, thanks perhaps to a rising real estate market, does not lead to the conclusion that she suffered no financial hardship. The definition of "hardship" in the Oxford English dictionary includes "a condition which presses unusually hard upon one who has to endure it". Hardship is not the equivalent of impossibility.
[28] In summation, this judicial review is not concerned with any possible error in the Notice of Assessment. Judicial review should be granted because the decision-maker misread the law and unreasonably fettered his discretion by failing to consider the circumstances set out in Section 10 of the Guidelines, and by not considering the total amount of tax owing and the cost to Ms. Gandy of retiring that debt.
ORDER
1. The judicial review is granted;
2. The decision of the assistant director, Revenue Collections, Calgary Tax Services Office, dated 26 August 2005 is set aside. The matter is referred back for re-determination before another person authorized to exercise second level discretion in accordance with Section 14 of the Guidelines; and
3. The applicant shall have her costs, but without counsel fee.
"Sean Harrington"
Judge
FEDERAL COURT
NAME OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-1593-05
STYLE OF CAUSE: JOANNE GANDY v. CANADA CUSTOMS AND REVENUE AGENCY
REASONS FOR JUDGMENT: HARRINGTON J.
APPEARANCES:
| Ms. Joanne Gandy Self Represented
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| Ms. Darcie Charleton
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SOLICITORS OF RECORD:
| John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Ontario |
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