Date: 20050902
Docket: T-1144-03
Citation: 2005 FC 1201
BETWEEN:
THE ESTATE OF RAYMOND B. DORT
Applicant
- and -
CANADA (MINISTER OF NATIONAL REVENUE)
Respondent
[1] In this case, the Minister of National Revenue was asked to exercise his discretion by waiving interest owed on an income tax debt. Section 220(3.1) of the Income Tax Act allows him to do this. It provides:
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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. |
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. |
[2] When Raymond Dort died in 2001, he had a piece of outstanding litigation with the Minister. In 1987, he invested in a partnership and claimed a business loss on his tax return, a loss which was eventually disallowed. Like many other investors in the partnership, he appealed to the Tax Court. His lawyers proposed, and it was agreed, that his case, and others, be left in abeyance pending the outcome of a test case. In that test case the Tax Court ruled in favour of the Minister. An appeal therefrom to the Federal Court of Appeal was pending at the time of Mr. Dort's death. A few months later, the Federal Court of Appeal upheld the Tax Court (King v. Canada, [2001] D.T.C. 5116; [2001] 1 C.T.C. 295; [2001] F.C.J. No. 56 (QL)).
[3] Thereafter, Gwyneth Dort, Raymond Dort's widow and executrix of his Estate, discontinued the Tax Court proceedings, and paid the principal owing, which was some $16,000. However, she did not pay the accumulated interest, which was then about $36,000. Through her lawyers she asked that all interest be waived. She cited three reasons: delay on the part of Revenue Canada in processing the return, financial hardship and mental distress.
[4] The Estate's initial request for interest relief was rejected. The appropriate Guidelines provide that if the taxpayer is of the view that the department did not exercise its discretion in a "fair and reasonable manner", she may request "that the Director of a district office or taxation centre review the situation." Mrs. Dort made that request.
THE DECISION UNDER REVIEW
[5] On 12 June 2003, D.B. Gibson, Director, Halifax Tax Services Office, issued his review of the decision conveyed on 23 December 2002 by J.F. Lee. He went through the three items at issue: delay in processing the amount of interest owing, financial hardship and mental distress. He concluded that the decision of Mr. Lee was correct. However, due to a delay in the King test case at the Federal Court of Appeal level, he cancelled interest from 29 May 2000 to 15 January 2001.
ISSUES
[6] This case brings into issue certain provisions of the Income Tax Act known as the "Fairness Package", Circular IC-92-2 issued by the Canada Customs and Revenue Agency as "Guidelines For the Cancellation and Waiver of Interest and Penalties", as well as Internal Directive ARD-92-01.
[7] The Estate alleges that the decision under review was unreasonable and procedurally unfair in the way that the processing delays, Mrs. Dort's mental distress and the amount in issue were treated or not treated, taking into account the Dorts' overall compliance with tax legislation over the years. Furthermore, Mr. Gibson's decision is fatally defective as regards the request that delays in processing be taken into account because he was to review a first level decision. In fact, and in law, it is alleged that there was no first decision on that point.
STANDARD OF REVIEW
[8] In accordance with the decisions of the Supreme Court in 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 judicial review of decisions of administrative tribunals must be approached functionally and pragmatically. Depending on the circumstances, the applicable standard of review is correctness, unreasonableness or patent unreasonableness. In Lanno v. Canada (Customs and Revenue Agency), 2005 FCA 153, [2005] F.C.J. No. 714 (QL), the Federal Court of Appeal overruled the trial judge who had applied the standard of patent unreasonableness, and held that the appropriate standard was reasonableness. The decision under review in that case was a decision of a tax official not to exercise his discretion under section 152(4.2) of the Act so as to permit the reassessment of Mr. Lanno's returns beyond the normal reassessment period, which reassessment would have resulted in a refund. That section, like the section in question in this case, section 220(3.1), was part of the Fairness Package which was introduced in 1991. Mrs. Dort submitted that a discretionary decision with respect to the waiver of interest is likewise subject to a reasonableness standard of review. That submission is correct. The Federal Court of Appeal has just recently specifically extended Lanno, supra, to section 220(3.1) of the Income Tax Act (Comeau c. Agence des douanes et du Revenue du Canada, 2005 CAF 271).
BACKGROUND
[9] The facts are not really in dispute. In 1987, Mr. Dort invested in a partnership known as "Records International". In his 1987 income tax return, which was timely filed on or before 30 April 1988, he claimed a business loss as a result thereof. The respondent alleges that he was advised in September 1988 that the processing of his 1987 return was delayed while Revenue Canada was reviewing the partnership. His return was assessed 12 July 1990 and the business loss was allowed.
[10] However, by a notice of reassessment issued 29 April 1992 the loss was disallowed.
[11] In response, Mr. Dort filed a notice of objection and by 29 January 1993 had received a notice of confirmation from Revenue Canada confirming the reassessment. Unfortunately, neither party has kept a full set of records so that the actual documents are not at hand.
[12] Thereafter, in February 1993, Mr. Dort filed an appeal to the Tax Court which, as aforesaid, was held in abeyance pending the result of the test case. However, he did not pay the tax and interest as assessed against him. The principal amount owing of $16,294.18 was only paid by the Estate in 2002. Accrued interest, which is now in excess of $35,000, was never paid in whole or in part.
[13] On 3 July 2001, the Estate's solicitors made an application under the Fairness provisions of the Income Tax Act, and specifically referred to Information Circular 92-2. At that time, and in subsequent correspondence, they constantly sought a waiver of all interest.
ANALYSIS
Delay in Processing
[14] The notice of reassessment which disallowed the deduction was only issued four years after Mr. Dort's original return. $8,629.64 of the interest calculated constituted arrears, interest charged and refund interest reversed as a result of that reassessment. Mrs. Dort submits that interest should be waived as Mr. Dort was not informed within a reasonable time that the amount was owing. Section 6(a) of Information Circular 92-2 provides:
6. Cancelling or waiving interest or penalties may also be appropriate if the interest or penalty arose primarily because of actions of the Department, such as:
(a) processing delays which result in the taxpayer not being informed, within a reasonable time, that an amount was owing;
[15] It is not necessary for the Court to form an opinion as to whether it would be appropriate to waive interest because of delays. Mr. Gibson's decision in this regard is fatally flawed because it does not accord with Mrs. Dort's legitimate expectations, and, in part, was based on an incomplete record.
[16] The fact of the matter is that, as has been admitted in this Court, the initial decision of J.F. Lee was limited to financial hardship and mental distress. The delay-in-processing issue was covered in April 2002 by the Department which sent the Estate's solicitors a "duplicate" unsigned copy of a letter dated 22 October 2001, purportedly issued by T.A. Wright, Assistant Director, Client Service Division. That letter denied the application as regards the delay in processing. However, that letter had never been reviewed by Mr. Wright or put to him for his signature. Thus, there was no first level decision for Mr. Gibson to review.
[17] Mrs. Dort legitimately expected that there would be both a first level and second level decision. Judicial review would only be necessary if she were not successful at the second level. The principle of legitimate expectations is part of procedural fairness. See Mount Sinai Hospital Centre v. Quebec (Minister of Health and Social Services), [2001] 2 S.C.R. 281 per Binnie J. at para. 35.
[18] As Lord Fraser of Tullybelton said in Attorney General of Hong Kong v. Ng Yuen Shiu, [1983] 2 A.C. 629 (J.C.P.C.):
...when a public authority has promised to follow a certain procedure, it is in the interest of good administration that it should act fairly and implement its promise, as long as implementation does not interfere with its statutory duty.
[19] The decision as regards delays in processing is also unreasonable in the manner in which Mr. Gibson took inspiration from a memorandum from the Kitchener-Waterloo office, dated 5 September 2002, which dealt with Fairness requests with respect to unreasonable delays concerning another partnership, the Mainstream Productions Partnership. Mr. Gibson followed the decision in that case that there was an unreasonable delay caused by the rescheduling of the hearing at the Federal Court of Appeal in the King test case, because there were no appeal books available for the judges. Mr. Gibson, in like manner, waived interest from 29 May 2000 to 25 January 2001. However, he did not have before him a number of exhibits referred to in the memorandum including the Kitchener Audit chronological sequence of file completion, and appeals diary. The memorandum stated that the Kitchener office had found there were no unreasonable delays at the audit and objection stages in the Mainstream Productions Partnership; yet Mr. Gibson did not pull the appropriate Halifax files in order to make the same analysis with respect to the partnership in question "Records International". Furthermore, the Mainstream Productions Partnership memorandum stated that investors would have been aware that they had a balance outstanding of the objection stage but added: "check if Appeals sent an "Acknowledgement Letter" to the taxpayer explaining that the interest continued to accrue on the balance in dispute". Mr. Gibson made no such check.
[20] Having utilized the Mainstream Productions Partnership memorandum, it was only proper and reasonable that Mr. Gibson follow the entire exercise proposed therein.
[21] The Minister cites the decision of Nadon J., then of this Court, in Young v. Canada (1997) 138 F.T.R. 37 for the proposition that the burden lay upon Mrs. Dort to bring forth the facts which might support a favourable exercise of discretion. That is quite true, but does not assist in this case. In Young, the pertinent facts were within the knowledge and control of the taxpayer. In this case, the facts relating to the delays in investigating the partnership and in processing the tax return are within the exclusive knowledge of the Minister, not the taxpayer.
Mental Distress
[22] Paragraph 5(d) of Guidelines IC-92-2 provides:
5. 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. For example, one of the following extraordinary circumstances may have prevented a taxpayer, a taxpayer's agent, the executor of an estate, or an employer from making a payment when due, or otherwise complying with the Income Tax Act:
...
(d) serious emotional or mental distress such as, death in the immediate family.
On this point, Mr. Gibson's decision was in review of J.F. Lee's decision. He found that there was no evidence that Mrs. Dort's natural distress upon the death of her husband prevented her from dealing with the Estate's financial matters. She had demonstrated an ability to attend to complex financial matters. Mr. Gibson's decision is not reviewable.
[23] There must be at least some causal connection between the mental distress and an inability to act.
Financial Hardship
[24] Mrs. Dort has also sought a waiver of interest based on the fact that she was unable to conclude a reasonable payment arrangement. Section 7 of the Guidelines provides:
7. It may be appropriate, in circumstances where there is an inability to pay amounts owing, to consider waiving or cancelling interest in all or in part to facilitate collection. For example,
(a) When collection has been suspended due to an inability to pay.
(b) When a taxpayer is unable to conclude a reasonable payment arrangement because the interest charges absorb a significant portion of the payments. In such a case, consideration may be given to waiving interest in all or in part for the period from when payments commence until the amounts owing are paid provided the agreed payments are made on time.
[25] Mr. Gibson rightly held that Mrs. Dort as the executrix of the Estate was responsible for ensuring the debt was paid in full from the proceeds of the Estate. The Estate had ample assets. Interest was allowed to accumulate because Mr. Dort gambled that the test case would be successful. When Mrs. Dort later paid the principal amount of the debt, she could also have paid the accrued interest. She never asked for a repayment schedule.
[26] Mrs. Dort also raised the possibility that Mr. Gibson had not really taken a fresh look at the matter. His assistant had asked Mr. Lee for a memo. However, there is no evidence that such a memo was ever prepared. No case has been made out that Mr. Gibson did not exercise independent discretion.
[27] In conclusion, the application for judicial review is allowed and the matter referred back to a person authorized by the Minister, other than Mr. Gibson, for the second level review contemplated by the Guidelines. However, that review need only be limited to the issue of delays in processing.
[28] The Estate shall have its costs.
"Sean Harrington"
Judge
Ottawa, Ontario
September 2, 2005
FEDERAL COURT
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-1144-03
STYLE OF CAUSE: THE ESTATE OF RAYMOND B. DORT
AND
CANADA (MINISTER OF NATIONAL REVENUE)
PLACE OF HEARING: HALIFAX, NOVA SCOTIA
DATE OF HEARING: AUGUST 3, 2005
REASONS FOR ORDER : HARRINGTON J.
DATED: SEPTEMBER 2, 2005
APPEARANCES:
Raymond G. Addlington FOR APPLICANT
John J. Ashley FOR RESPONDENT
SOLICITORS OF RECORD:
Patterson, Palmer FOR APPLICANT
Halifax, Nova Scotia
John H. Sims, Q.C. FOR RESPONDENT
Deputy Attorney-General of Canada