OTTAWA, Ontario, this 26th day of October, 2005
PRESENT: THE HONOURABLE PAUL ROULEAU
BETWEEN:
and
THE ATTORNEY GENERAL OF CANADA
REASONS FOR ORDER AND ORDER
[1] This is and application for judicial review under the fairness provisions in s. 220(3.1) of the Income Tax Act R.S.C. 1985 c. 1 (5th) (the "ITA"), of the decision of Canada Customs and Revenue Agency ("CCRA") Officer, dated January 20, 2005, in which the CCRA Officer denied the applicant's application for cancellation of interest and late filing fees on fairness grounds.
[2] The applicant, Palwinder Singh is a self-represented litigant. He immigrated to Canada some years ago with his parents. After completing his secondary education, his ambition was to become a doctor of optometry. He enrolled in a four year course at a university in Philadelphia, PA. During the first two years, while attending university, he survived financially on some student loans and parental assistance. In the summer of 1994, with two years still remaining to complete his studies and obtain his degree, he realized that he no longer had the financial means to continue or pursue his education. He approached a company in Winnipeg operating as the King Optical Group ("King Optical") which owned a number of retail optical outlets in Western Canada. The financial arm of King Optical was known as Profesco Limited ("Profesco"). The applicant entered into an agreement with Profesco whereby they would advance funds (loans) to assist him in pursuing his education and, in return, upon completion and obtaining his degree he would return to Canada and be employed by King Optical at an outlet of their choosing at a fixed salary; for every month he remained in their employ they would write off 1/48th of the loan over a four year period with the understanding that this monthly write off would be added to his income for tax purposes.
[3] Upon graduating in the spring or summer of 1996, the principals sent him to Vancouver where he was to be employed in one of King Optical outlets. For some reason, unclear to the Court, the position was unavailable once he had reached his destination and no other opportunity for employment was offered. The applicant, in order to qualify to practice his profession in British Columbia, would have been required to pay considerable admission fees and would have had to undergo extensive admission exams. This option did not appeal to the applicant, being unemployed and without income. He knew that could return to Pennsylvania and that, having graduated in optometry in that State, he could immediately commence work in his chosen profession without obstruction or hindrance.
[4] During the final two year period Profesco had advanced the sum of $50,000.00 US and the evidence is that the money paid for tuition, books and equipment for the final years of study.
[5] With the tacit understanding of Profesco, the applicant, still unemployed after six months, moved to Pennsylvania in January 1997, returning to Canada (Edmonton) in March 2000. At that point in time the admission to the profession was made easier; the applicant's years of practice in the Unites States since graduation were now recognized and this allowed him to pursue his career in Canada.
[6] At the termination of their 1997 fiscal year and upon filing with CCRA, Profesco wrote off as a bad debt the loan of $70,827.12, having converted the initial $50,000.00 US advanced to the applicant into Canadian funds. The applicant was not aware of this matter, nor was he advised until he received a letter from CCRA in early 2000, while he was still residing in Pennsylvania. The letter advised him that he should have filed an income tax return in Canada for the taxation year 1997 and declared income in the amount of $70,827.12. This letter, dated December 21, 1999, advised the applicant to respond by February 15, 2000 or an assessment would issue. In fact, an assessment was prepared in October 2000 determining that the applicant had income in 1997 (the year Profesco wrote off the loan). It determined that the income for the year was $70,827.12. He was assessed interest, penalties and showed a debit as owing to CCRA the amount of $38,057.94
[7] None of these facts are challenged or are in dispute.
[8] For further evidence, the applicant submitted in his material the agreement executed with Profesco on June 18, 1996. In this agreement the following paragraph is of importance:
"C. The Professional is a student currently completing a course in optometry at The Pennsylvania College of Optometry who wishes to employ the services of Profesco to obtain financial assistance for him/her for a period of two (2) years, and upon obtaining a license to practice optometry to employ Profesco to manage his/her professional office.
[This outlines the fact that it was a student loan]
[9] Paragraphs 11, 12 and 13 of the Agreement concern management services that were to be provided by Profesco:
11. Profesco shall provide to the Professional on a timely basis and in a professional manner:
a) equipped and staffed premises, including, where negotiated specialized computer programs and business/market consultants;
b) marked studies from time to time designed to enhance income possibilities;
c) where warranted, and negotiated, guaranteed income for a period of time as the parties may agree.
12. The parties acknowledge and agree that the premises and the contents thereof are the property of Profesco and the Professional agrees that he/she shall not pledge nor in any way use same as security for his/her own purposes.
13. The Professional acknowledges that Profesco shall determine the location, hours of operation, staffing and equipping of the premises.
[These sections of the Agreement further outline the obligations that Profesco had undertaken to provide the applicant and which they were unable or unwilling to provide.]
[10] The issue before the Court is the fact that the CCRA auditor, without evidence or particular knowledge and of his own volition, determined that since Profesco had written off a bad debt it became income to the applicant and determined that it should have been declared as such for the taxation year 1997. It is my understanding that loans that are written off may be considered income when they are non arm's length, low interest or forgiven. None of these characteristics are applicable in this particular case. There is no doubt that Profesco may write off bad debts but here they continued to pursue the applicant for repayment; there is no indication of forgiveness. The auditor at CCRA was certainly aware that such was the situation. He was told during telephone conversations by the applicant that such was the case. This is part of the uncontested evidence. Following these conversations, it was suggested to him that once the arrangements were made (with Profesco) he could then file for a T-1 adjustment.
[11] The applicant had made arrangements with Profesco to reimburse them during the year 2000 the sum of $50,000 to liquidate the debt in full with the understanding that they would not pursue him for the remainder. This agreement was entered into with an officer of Profesco with the understanding it would advise CCRA that arrangements had been made and that there had been reimbursement. This never came to pass and, as a matter of fact, even after the applicant paid the $50,000, in January 2001 Profesco was still pursuing him for $33,346.67 which constituted the excess of the $50,000 not repaid together with interests.
[12] At the time that this auditor assessed the applicant for the 1997 taxation year he was well aware that Profesco had continued to pursue the collection of the debt. He was further aware, when assessing the applicant's income tax return for the year 2000 in the spring of 2001, that $50,000 had been remitted and that the debt was not forgiven. It should have become obvious to CCRA that Profesco, good corporate citizens as they must be, more than likely disclosed that they had recaptured the so-called write-off in reporting their activities for the year 2000.
[13] The determination with respect to the write-off being interpreted as income to this applicant is clearly erroneous. Perhaps Profesco, realizing that they had not lived up to their end of the bargain, that of setting up an outlet for the applicant in British Columbia as well as pay him a minimum wage, in their wisdom may have determined that the debt may not be enforceable or recoverable. How can an unenforceable debt become income to a debtor? Further, how could CCRA determine that the $70,827.12 was income for the year 1997? This is incomprehensible. The debt was incurred between the fall of 1994 and the spring of 1996. What if in fact Profesco had written it off in the year 1999 and forgiven the debt in the year 2002? How can one arbitrarily attribute the amount to the taxation year 1997 or tax it as forgiven until such time as the facts indicate that such was the case?
[14] I have a further problem with respect to the accounting methods adopted by the CCRA assessment officer. It is evident that the moneys advanced were student loans and were not, as suggested, a business loan that could be applied as a non-capital loss for the taxation year 2000. In fact, the applicant was reassessed in May 2001 and CCRA determined that the $50,000.00 that he had reimbursed for the loan could become a business loss; it then applied the tax refund he had paid and remitted in instalments during the year 2000 together with the business loss to the outstanding debt of $38,052.24 indicating that he still owed CCRA $19,850. Since that time CCRA seized from the taxation year 2001 the sum of $3,466.24 which was the excess of his remittance over the tax due. Similarly, in 2002 CCRA seized $3,199.71. In October 2001 CCRA initiated garnishee proceedings at the rate of $1,050 per month for the next several months and this totalled $8,400. If one includes the seized refunds for the taxation years 2000, 2001 and 2002, along with the $8,400 paid to CCRA, a total of $20,411 has now been applied to the alleged debt and there remains an outstanding claim of $19,117.50.
[15] The applicant submitted a request under section 220(3.1) of the Act for forgiveness which was denied. It is correct that this applicant did not file notices of objection but, considering the circumstances, and though my jurisdiction is limited and I can only consider on judicial review whether or not the Minister's delegate exercised his discretion judicially and reasonably, I am satisfied that the exercise of discretion was based on erroneous findings of fact as submitted in the observations prepared by the Audit Division in Winnipeg. There were two requests for forgiveness submitted to waive interest and penalty on taxes for 1997, the first one dated April 2004 and a further one on November 17, 2004. Both were denied. In the first summary prepared by the auditor which was to be considered by the Minister's delegate responsible for the exercise of discretion in considering fairness, it is suggested:
"Client went to Vancouver but then decided to go to Philadelphia to work. ... Notice of assessment indicated a balance outstanding of $38,057.94 included interest of $7,566.57 and a late filing penalty of $4,430.00. Client repaid Profesco $50,000 Canadian in 2000. As of December 31, 2000 client still owed Profesco $33,346.67 according to letter from Profesco dated January 31, 2001.
...
RECOMMENDATIONS
Client has a poor compliance history and has let arrears interest accrue on balance outstanding. It is the client's responsibility to be aware of the tax consequences when he chooses to ignore a signed contract and leave the country. If the client had abide by the contract, then none of this would have happened. No extenuating circumstances prevented the client from incurring the late filing penalty and arrears interest charges. This was as a result of the client's own actions. RECOMMENDED: CCRA upholds the arrears interest and late filing penalty charged of the assessment of the 1997 tax return.
[16] A second memorandum to file in January 2005 - the observations submitted to the forgiveness officer. The following is admitted:
Profesco did not find work for the client in Vancouver and he moved to Philadelphia to work in January 1997. Client informed Profesco about his move and they said that client would not have to pay back money for two years. In 1998 they asked client to pay them back in bulk or in instalments. Client did not file a 1997 tax return. ... Auditor notes state client "disappeared" and did not advise Profesco he was leaving the country. ... Cilent has poor compliance record. ... I agree with the client that the inclusion of the loan as business income on the 1997 tax return is complex but the client reneged on his deal with Profesco and left the country. If client had abided by the contract he signed with Profesco, none of this would have happened. ... IT 340R deals with forgiveable loans/repayable award.
[17] It is evident from the first set of observations and recommendations that it was unfair to suggest that the applicant had a poor compliance history. It is also suggested that he had failed to abide by a contract and that had he not done so this would never had happened. This is not an accurate summary of the facts. The applicant did not ignore the signed contract and leave the country. He did so with the knowledge of Profesco and their tacit understanding since they could not comply with their undertaking in the agreement signed in 1996.
[18] Turning to the observations submitted in January 2005, it is confirmed that the applicant refunded Profesco and that he would not have to pay back money for two years. The officer goes on to state "if client had abided with the contract he signed with Profesco, none of this would have happened". This is an inaccurate and certainly unsubstantiated allegation. Being aware or having observed that he had two years to pay back the money, why did CCRA presume that the loan had been forgiven and could be determined to be income? In addition, the situation certainly does not justify taxing the applicant for income in the year 1997. The most glaring oversight in the observations prepared and filed with respect to the two applications for forgiveness did not, in any way, indicate that CCRA had determined the amount of $70,827.12 to be income without offering any explanation that they had converted an outstanding loan into income.
[19] After hearing submissions by both parties on the morning of October 12, 2005, and after having carefully reviewed the file following to the court appearance and being aware that this applicant was representing himself, I chose to have both the applicant and counsel for the respondent appear before me on the following day. Upon the parties attending, I directed the applicant to swear an oath. I was seeking clarification on certain aspects concerned with the evolution of his situation with Profesco; his Memorandum was lacking many particulars. After taking the stand, he produced for the Court copies of his income tax returns for the years 2001 up to and including 2004. Attached to two of these returns were assessment approvals confirming that his returns had been filed on time. He further offered some explanations with respect to moving to Vancouver, at the request of Profesco. He confirmed that hey could not accommodate him at their existing outlet and were not prepared to invest in another location. He further explained that he remained unemployed for six months and that Profesco was well aware that he was returning to Pennsylvania. I refer to this evidence in closing since some of the facts upon which I have relied in drafting these Reasons were not sufficiently referred to in the submissions by the parties.
Counsel for the respondent was given an opportunity to cross-examine.
[20] There is no doubt that my jurisdiction is limited under section 220(3.1) of the Act but I am satisfied that the spirit of the legislation requires that the Minister's delegate, responsible for the exercise of discretion requested to waive penalties and interest payable by taxpayers, should be in a position to rely on accurate facts. As I view it, they were not accurately related to the forgiveness officer in the submissions prepared by audit for his consideration.
[21] The Court is aware of the existence of section 152(4.2) of the Act which is also part of what is referred to as fairness provisions which provides taxing authorities with the discretion to grant relief against certain provisions of the Act in cases where normal deadlines for reassessing income tax returns to either eliminate or reduce tax payable should be considered. That section reads:
| 152(4.2) Notwithstanding subsection 152 (4), 152(4.1) and 152(5), for the purpose of determining, at any time after the expiration of the normal reassessment period for a taxpayer who is an individual (other than a trust) or a testamentary trust in respect of a taxation year
(a) the amount of any refund to which the taxpayer is entitled at that time for that year, or
(b) a reduction of an amount payable under this Part by the taxpayer for that year,
the Minister may, if application therefore has been made by the taxpayer,
(c ) reassess tax, interest or penalties payable under this Part by the taxpayer in respect of that year... |
152(4.2) Malgré les paragraphes (4), (4.1) et (5), pour determiner à un moment donné après la fin de la période normale de nouvelle cotisation applicable à un contribuable - particulier, autre qu'une fiducie, ou fiducie testamentaire - pour une année d'imposition le remboursement auquel le contribuable a droit à ce moment pour l'année ou la reduction d'un montant payable par le contribuable pour l'année en vertu de la présente partie, le minister peut, sur demande du contribuable:
( a) établir de nouvelles cotisations concernant l'impôt, les intérêts ou les pénalités payables par le contribuable pour l'année en vertu de la présente partie;
... |
[22] I have been satisfied that the decision was based on observations that were improprely submitted by audit at CCRA, that as a result of these submissions the forgiveness officer clearly ignored relevant facts or took into consideration irrelevant facts and the decision is contrary to law.
ORDER
THIS COURT ORDERS that this application is allowed and the matter returned for reconsideration by the Minister's delegate. Should he accede that my consideration of the facts and the applicable law have merit and waive the penalties and interests imposed, I then urge the applicant to make an application to the Minister under section 152(4.2) of the Act and seek refund of the funds wrongfully retained and collected by CCRA.
"Paul Rouleau"
DEPUTY JUDGE
NAME OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-293-05
STYLE OF CAUSE: PALWINDER SINGH and
THE ATTORNEY GENERAL OF CANADA
DATE OF HEARING: October 12, 2005
REASONS FOR ORDER: Honourable Paul Rouleau
APPEARANCES:
Mr. David Besler FOR RESPONDENT
SOLICITORS OF RECORD:
None FOR THE APPLICANT
John H. Sims, Q.C. FOR RESPONDENT
Deputy Attorney General of Canada
Ottawa, Ontario