Date: 20010604
Docket: T-1485-00
Neutral Citation: 2001 FCT 584
Ottawa, Ontario, this 4th day of June 2001
PRESENT: THE HONOURABLE MR. JUSTICE PELLETIER
BETWEEN:
HARI CHAND SHARMA
Applicant
- and -
THE MINISTER FOR CANADA CUSTOMS AND
REVENUE AGENCY
Respondent
REASONS FOR ORDER AND ORDER
PELLETIER J.
[1] In the early 1990s, the Income Tax Act (the "Act" or "ITA") was amended to include provisions which gave the Minister of National Revenue (the "Minister") a discretion to write off interest arrears and penalties in certain cases. At the same time, other provisions were added to give the Minister the discretion to allow a taxpayer to make certain elections even though the time prescribed for making those elections had passed. These amendments are referred to colloquially as "the Fairness provisions". In this case, a taxpayer asked for the benefit of one of those provisions, subsection 220(3.2) of the Act which deals with late filed elections with respect to forward averaging of income. His request was refused so he applies to this Court for judicial review of the decision.
[2] The following brief description of forward averaging is taken from the respondent's Memorandum of Fact and Law:
Scheme of the Income Tax Act regarding Forward Averaging
16. Between the taxation years 1982 and 1987, a taxpayer could, under certain circumstances, forward average pursuant to section 110.4 of the Income Tax Act (the "Act"). To forward average, an individual would file an election pursuant to subsection 110.4(1) of the Act with respect to an amount of income (the "Amount") and pay taxes on the Amount in that year. In a subsequent year, the taxpayer could file a second election, pursuant to subsection 110.4(2) of the Act, to include the Amount (or some portion thereof) in income again, but get credit for the taxes already paid on the Amount in the prior year. Forward averaging was only beneficial if the taxpayer paid taxes on the Amount in the prior year at a higher marginal rate than in the subsequent year.
Sections 110.4 and 120.1 of the Income Tax Act,
1970-71-72, C. 63, as amended
[3] Mr. Sharma immigrated to Canada in the 1980s. He was economically successful and paid a significant amount of income tax. He elected to have this income be the subject of forward averaging. He then emigrated from Canada to New Zealand where he remained until 1994. He returned to Canada in February 1994. When it came time to file his income tax, he entrusted the task to a firm of accountants who requested some information from Revenue Canada (Revenue Canada and the Canada Customs and Revenue Agency will both be referred to in these reasons as "the Agency"). He was sent information which included information relating to capital gains exemption but nothing related to the amounts which he had available for forward averaging. When Mr. Sharma received his notice of assessment in 1995, he realized that he had a significant balance in his income averaging account and very quickly asked to be allowed to file an election to bring that income forward and thereby get the advantage of the forward averaging.
[4] At the same time, Mr. Sharma filed amended financial statements which reduced his income by $10,000. The task of dealing with the amended statements was assigned to Mr. Guimond of Office Examination, Surrey Taxation Centre. The deductibility of the additional expenses claimed by Mr. Sharma was eventually resolved. The request for consideration under the Fairness provisions was also given to Mr. Guimond. He undertook the initial investigation and prepared a report. His undated report recommended that the request be refused. Mr. Guimond noted the following:
... Mr. Sharma states that his accountant Mr. Shailendra Singh of Evancic Perrault Robertson (Surrey) office requested multi-year data prior to filing the 1994 income tax return but was not sent the complete information on May 2, 1995. When Mr. Sharma filed amended returns requesting the withdrawal, he also submitted an amended business income statement with a decrease to income of greater than $10,000.00. A letter was issued on May 1, 1997 requesting supporting documentation for the business expenses claimed which appeared high and unreasonable under the circumstances yet no information was provided. ...
Based on the taxpayer's information presented, the fact that no reply was received to our letter dated May 1, 1997 and the fact that the taxpayer was not resident in Canada throughout 1994; we recommend to deny the request to allow the forward averaging election pursuant to subsection 110.4(2) of the ITA.
[5] The report went on to set out the detailed rationale for the recommendation. As far as the year 1994 was concerned, Mr. Guimond pointed to the express terms of subsection 110.4(2) of the Act which requires that a person have been resident in Canada for the entire year as a condition of being able to make the election for forward averaging:
(2) Where an individual files with the individual's return under this Part for a taxation year ending before 1998 and throughout which the individual was resident in Canada an election in prescribed form on or before the day on or before which the individual was, or would have been if tax had been payable under this Part by the individual for the year, required to file a return of income under this Part for the year, there shall be added in computing the individual's taxable income for the year the amount, if any, by which ...
(2) Le particulier qui présente au ministre, en même temps que sa déclaration de revenu produite en vertu de la présente partie pour une année d'imposition se terminant avant 1998 et tout au long de laquelle il a résidé au Canada, un choix sur le formulaire prescrit, au plus tard à la date à laquelle il est tenu de produire cette déclaration ou en serait tenu s'il devait payer un impôt en vertu de la présente partie pour l'année
emphasis added nos italiques
[6] As for the 1995 taxation year, Mr. Guimond noted that Mr. Sharma did not file income tax returns for the 1987, 1988, 1989, and 1990 tax years. He late filed his returns for the 1991-1994 taxation years in May 1995 in which he indicated "that he and his spouse were resident of Canada during the period and claimed the goods and services tax credit, child tax credit and child tax benefit". Mrs. Sharma received over $5,000 in cash payments in respect of these various credits when it appeared that she was not eligible because she had not resumed residence until February 1994.
[7] As for the issue of the request for multi-year data, Mr. Guimond noted that the original request had not been produced so that it was not possible to confirm exactly what had been requested. However, the response had been faxed to Mr. Sharma's accountant, had a cover sheet which referred to "C.G. [capital gains] carry forward information".
[8] The report concluded by noting that:
In addition, Mr. Sharma has not provided any documentation as requested to verify the business expenses claimed and yet he is a professional accountant and should be fully aware of our requirements for keeping documentation therefore we are denying his 1995 request to claim business expenses and also disallowing all business expenses claimed for 1996.
[9] Mr. Guimond's report went to one L. Paraskake, Office Audit, Surrey Taxation Centre, who replied to Mr. Sharma's request on July 28, 1997 denying Mr. Sharma's request. The grounds for the denial were that "... you do not meet the conditions as set out in the above information circular and no reply was received to our letter dated May 1, 1997 in which we requested further information and documentation. Please note that you became a resident of Canada on February 15, 1994, and according to subsection 110.4(2) of the ITA, you must be resident throughout the year to qualify for the election."
[10] It should be noted at this point that the May 1, 1997 letter was with respect to the issue of the business expenses and was not in relation to the request for late filing.
[11] Mr. Sharma was not content with this reply and on March 13, 2000, he requested a second review of his request. This was undertaken by Michael Patak, Officer, Examination Section, Surrey Taxation Centre, who prepared a report dated July 12, 2000. Mr. Patak began by noting the additional information provided by Mr. Sharma in his March 13, 2000 letter which was that his 1986 return was prepared by his accountants and that he did not familiarize himself with the forward averaging provisions of the Act. He also noted the fact of emigration to New Zealand in 1987 with return to Canada in 1994. Mr. Patak then undertook a review of "History of Compliance" and noted the following:
- some history of balances outstanding on the account and accumulating arrears interest.
- disallowance of claims for unsupported business expenses in relation to 1995 and 1996 taxation years.
- Mr. Sharma had been given a written warning as to the poor quality of his records.
- "TP [taxpayer] and spouse have fraudulently filed income tax returns for 1991 to 1993 as residents of Canada, receiving child tax credits, GST and CTB credits and provincial tax credits to which they were not entitled to".
[12] Mr. Patak then reviewed in detail the history of dealings between the Agency and Mr. Sharma, referring to Mr. Guimond's report which was obviously before him.
[13] Mr. Patak recommended refusal of the request. With respect to 1994, he took the position that Mr. Sharma had not been a resident of Canada throughout the year. With respect to the issue of the Agency's failure to supply the information which Mr. Sharma says he requested, Mr. Patak simply noted that there was no documentation as to the nature of the request for information. In other words, Mr. Sharma could not substantiate that he had requested income averaging information as opposed to (or in addition to) capital gains information.
[14] The concluding paragraph of the report is as follows:
Our review agrees with the previous denial of the initial request. The client has not established the existence of a Departmental/Agency error, nor has he established that the alleged error has prevented him from claiming the accumulated forward averaging withdrawal amount for the 1995 [sic] on the filing of his return for this taxation year, as specified in subsection 110.4(2). The client has not exercised reasonable care in the administration of his taxation affairs under the self assessment system. The late submission of the election may be considered to be retroactive tax planning. We recommend denial of the request.
[15] In accordance with the Agency's policy for the handling of fairness requests, the report was forwarded to Ms. Linda Ditto, the Assistant Director, Individual and Estates Return Processing Division who is authorized under subsection 220(2.01), reproduced below, to perform the duties of the Minister under subsection 220(3.2) of the Income Tax Act:
(2.01) The Minister may authorize an officer or a class of officers to exercise powers or perform duties of the Minister under this Act.
(2.01) Le ministre peut autoriser un fonctionnaire ou une catégorie de fonctionnaires à exercer les pouvoirs et fonctions qui lui sont conférés en vertu de la présente loi.
[16] Ms. Ditto reviewed the applicant's correspondence, Mr. Guimond's report, Mr. Patak's report, Mr. Sharma's 1995 and 1996 tax returns, the Agency's computer records of Mr. Sharma's 1994 return and his compliance history. She then wrote to Mr. Sharma on July 13, 2000 denying his request.
[17] In her letter, Ms. Ditto repeated the position previously taken with respect to Mr. Sharma's residence in 1994 saying that he was ineligible for the exercise of the Minister's discretion because he had not been a resident of Canada for the entire year. Ms. Ditto went on to find that Mr. Sharma had not established any departmental/agency error with respect to the information provided by the department. Ms. Ditto concluded as follows:
Ignorance of the law and reliance on your representative are not valid grounds for relief under the Fairness Package legislation. Individuals who choose a representative to administer their income tax affairs remain ultimately responsible for any actions (or lack thereof) of the representatives on their behalf. In addition, the late submission of the election may be considered to represent retroactive tax planning.
[18] Following receipt of this letter, Mr. Sharma launched an application for judicial review. The grounds for his application are that the Minister' representatives have failed to take into account subsection 250(1)(a) of the Act in dealing with the issue of residence. That provision says:
250. (1) For the purposes of this Act, a person shall, subject to subsection 250(2), be deemed to have been resident in Canada throughout a taxation year if the person
(a) sojourned in Canada in the year for a period of, or periods the total of which is, 183 days or more; ...
250. (1) Pour l'application de la présente loi, une personne est réputée, sous réserve du paragraphe (2), avoir résidé au Canada tout au long d'une année d'imposition si:
a) elle a séjourné au Canada au cours de l'année pendant une période ou des périodes dont l'ensemble est de 183 jours ou plus; ...
[19] In addition, Mr. Sharma says that the entire process is tainted by a reasonable apprehension of bias because the original report by Mr. Guimond, which was reviewed by all those who were involved afterwards, was itself subject to a reasonable apprehension of bias. Mr. Sharma takes the position that there is a reasonable apprehension of bias on the part of Mr. Guimond because he was the auditor who questioned his business expenses and dealt with him on the issue of the tax credits. It is Mr. Sharma's position that Mr. Guimond either had, or a reasonable bystander would believe he had, formed an unfavourable impression of Mr. Sharma which coloured his report.
[20] The Minister's position is that subsection 250(1)(a) of the Act has been repeatedly interpreted so that sojourning and residence are mutually exclusive, that is, one who has taken up residence cannot be sojourning because the distinguishing characteristic of sojourning is its transience. It is a temporary passage whereas residence is a permanent state. As for the question of bias, the Minister points out that Mr. Guimond was not the decision-maker. Ms. Ditto was, and she had regard to many factors other than Mr. Guimond's report in coming to her decision. But the Minister's overall argument is that the exercise of his discretion is not subject to review by the Court except under the limited circumstances set out in Maple Lodge Farms Ltd. v. Canada, [1982] 2 S.C.R. 2, (1982), 44 N.R. 354:
It is, as well, a clearly-established rule that the courts should not interfere with the exercise of a discretion by a statutory authority merely because the court might have exercised the discretion in a different manner had it been charged with that responsibility. Where the statutory discretion has been exercised in good faith and, where required, in accordance with the principles of natural justice, and where reliance has not been placed upon considerations irrelevant or extraneous to the statutory purpose, the courts should not interfere.
[21] However, much has been written on the subject of standard of review since the decision in Maple Lodge Farms, supra. One wonders whether the standard of review should turn on the nature of the discretion or whether the standard of review of all decisions is now determined by the "pragmatic and functional analysis" described in Pushpanathan v. Canada (Minister of Citizenship and Immigration), [1998] 1 S.C.R. 982, (1998) 226 N.R. 201. In Baker v. Canada (Minister of Citizenship and Immigration), [1999] 2 S.C.R. 817, (1999), 243 N.R. 22, Madame Justice L'Heureux-Dubé addressed this very question:
[para 54] Administrative law has traditionally approached the review of decisions classified as discretionary separately from those seen as involving the interpretation of rules of law. The rule has been that decisions classified as discretionary may only be reviewed on limited grounds such as the bad faith of decision-makers, the exercise of discretion for an improper purpose, and the use of irrelevant considerations: see, for example,Maple Lodge Farms Ltd. v. Government of Canada, ... In my opinion, these doctrines incorporate two central ideas -- that discretionary decisions, like all other administrative decisions, must be made within the bounds of the jurisdiction conferred by the statute, but that considerable deference will be given to decision-makers by courts in reviewing the exercise of that discretion and determining the scope of the decision-maker's jurisdiction. ... It is, however, inaccurate to speak of a rigid dichotomy of "discretionary" or "non-discretionary" decisions. Most administrative decisions involve the exercise of implicit discretion in relation to many aspects of decision making. ...
[para 55] The "pragmatic and functional" approach recognizes that standards of review for errors of law are appropriately seen as a spectrum, with certain decisions being entitled to more deference, and others entitled to less: ...
[para56] Incorporating judicial review of decisions that involve considerable discretion into the pragmatic and functional analysis for errors of law should not be seen as reducing the level of deference given to decisions of a highly discretionary nature. In fact, deferential standards of review may give substantial leeway to the discretionary decision-maker in determining the "proper purposes" or "relevant considerations" involved in making a given determination. The pragmatic and functional approach can take into account the fact that the more discretion that is left to a decision-maker, the more reluctant courts should be to interfere with the manner in which decision-makers have made choices among various options. However, though discretionary decisions will generally be given considerable respect, that discretion must be exercised in accordance with the boundaries imposed in the statute, the principles of the rule of law, the principles of administrative law, the fundamental values of Canadian society, and the principles of the Charter.
[22] I take it from this that the Supreme Court has subsumed the Maple Lodge Farms test into the pragmatic and functional approach so that the issue is no longer whether the decision is one which is entirely discretionary, and therefore reviewable only on the grounds set out in Maple Lodge Farms. The inquiry must now be framed in terms of the "pragmatic and functional analysis" with a view to deciding how much deference will be shown to the decision-maker.
[23] The decision under review is the refusal of the Minister's delegate to allow the applicant to file elections under the forward averaging provisions of the Act after the deadline for the filing of such elections has passed. Applying the "pragmatic and functional" approach to this decision, and in particular the criteria set out in Baker, supra, one notes that the decision in question is not protected by a privative clause, but is one from which there is no right of appeal though there is access to judicial review. The expertise of the decision-maker is relatively high as it requires a comprehensive knowledge of the Income Tax Act to appreciate the significance to the individual of the election which he/she seeks to make. It is true that the particular decision is a discrete one which can be analysed discreetly but identifying the overall role of such a decision in the taxpayer's affairs and in the fair administration of the tax system, requires a knowledge of the system extending beyond the particular case. As in Baker, the decision-maker is the Minister or the Minister's delegate. In Baker, this was found to be grounds for deference due to the Minister's expertise.
[24] The purpose of subsection 110.4(2) of the Act is to allow the Minister to grant relief from time limitations in appropriate cases. The fact that each case turns on its own particular facts suggests that cases have limited precedential value. As a result, there is little reason for the Court to intervene in the name of public policy. Because the issue is access to a relieving provision, there is no ruling on an issue of legal entitlement, which once again suggests deference. All of the factors considered suggest a considerable degree of deference to the Minister's decision. In the circumstances, I conclude that the standard of review is patent unreasonableness.
[25] Turning now to the grounds of review suggested by the applicant, the first issue is the effect of subsection 250(1) of the Act which deems a person to be a resident for the whole year if that person sojourns in Canada for more than 183 days. There is abundant authority that this subsection does not apply to those who have actually taken residence in Canada in the course of a year. This result is arrived at by distinguishing between sojourning and residing in Canada. The authorities make these states mutually exclusive. See Zimmer v. M.N.R. (1981), 81 D.T.C. 550 (T.R.B.) and Loukine v. R. (1998), 98 D.T.C. 1566 (T.C.C.). As a result, this ground cannot succeed.
[26] In the course of argument, I inquired of counsel for the Minister whether the result achieved by such an interpretation was reasonable. On the face of it, the effect of the authorities relied on by the Minister is that someone who has sojourned in Canada for 6 months can take the benefit of subsection 110.4(2) of the Act but that someone who has been resident in Canada for 11 months could not. What is the logic of allowing the person with the more tenuous connection with Canada to take advantage of a relieving provision while denying it to someone with a more solid connection with this country? Since it is not necessary for me to answer this question in order to dispose of this application, I will not engage in speculation other than to note that, in the usual course, the effect of paragraph 250(1)(a) of the Act is to make someone liable for income tax. It may be that the deemed residence created by subsection 250(1) of the Act is limited to creating liability for income tax and does not extend to situations where actual residence is required. In any case, that question will have to wait until it arises on the facts to be answered. In this case, Mr. Sharma was actually resident in Canada so, on the basis of the authorities quoted above, he is not able to claim the benefit of subsection 250(1) of the Act.
[27] The issue of reasonable apprehension of bias was argued forcefully by Mr. Sharma. This ground of review alleges a denial of natural justice or procedural fairness. The standard of review in those cases is correctness. NAV Canada v. Canadian Air Traffic Control Assn., [1999] F.C.J. No. 1799 (F.C.A.), (1999), 250 N.R. 321, per Rothstein J.A. The allegation made by Mr. Sharma is that because Mr. Guimond was the auditor who dealt with him with respect to his contested business deductions and the disputed tax credits, he already had a poor impression of him when he undertook the fairness report. That report was before all subsequent decision-makers who are therefore all tainted. There are two difficulties with the argument. In the usual case, one proceeds from a know state of affairs about the relationship between two individuals to conclude that there is a reasonable apprehension of bias. In this case, the Court is asked to infer the state of the relationship so as to then infer a reasonable apprehension of bias. One cannot found an inference of lack of impartiality upon an inference as to the state of a relationship. The bigger difficulty with this argument is that Mr. Guimond was never the decision-maker. While the first level decision was made on the strength of his report, a fresh report was prepared for the second level review and a different decision-maker made the ultimate decision.
[28] The test for reasonable apprehension of bias was framed by the Supreme Court of Canada in Committee for Justice and Liberty et al. v. Canada (National Energy Board et al.), [1978] 1 S.C.R. 369, (1976), 9 N.R. 115, at page 394:
. . . the apprehension of bias must be a reasonable one, held by reasonable and right minded persons, applying themselves to the question and obtaining thereon the required information. In the words of the Court of Appeal, that test is "what would an informed person, viewing the matter realistically and practically--and having thought the matter through--conclude.
[29] In this case, it is doubtful if a reasonable person would necessarily believe that Mr. Guimond was biased, even if he were the decision-maker. But when the decision-maker is Ms. Ditto, who reviews Mr. Guimond's report as one document in a number of documents, a reasonable and right minded person would not conclude that there was a reasonable apprehension of bias.
[30] In the course of argument, the issue of irrelevant considerations was raised. The question was whether it was appropriate for the Minister to consider compliance history when assessing a request under the Fairness provisions. While all of these remedial measures are described as "the Fairness provisions", there is a qualitative difference between asking to be allowed to file an election out of time, and asking for penalties and interest to be written off. In the case of amounts to be written off, the taxpayer has a present liability to the Government of Canada from which he/she seeks to be released. There is no legal right to a write off. In the case of a late election, the taxpayer is seeking relief from a missed filing date. The delay in filing could be one day or it could be years but in either case, the taxpayer is seeking the benefit of a provision to which he/she would be entitled by law had the election been made in a timely fashion. The taxpayer is essentially seeking to be relieved from forfeiture.
[31] One can see that compliance history would be a relevant consideration when a taxpayer asks to have penalties and interest written off. Since these arise from non-compliance with the Act, the circumstances of that non-compliance are surely material to a determination as to whether the amounts in question should be written off. Furthermore, the taxpayer's entire compliance history is relevant to the question of whether it is fair to relieve the taxpayer of a present obligation. On the other hand, compliance history has a more tenuous relationship to the question of allowing the taxpayer to claim a benefit to which he/she would be entitled by law but for a failure to request the benefit in a timely way. But, in the end result, given the standard of review, it cannot be said that considering compliance history, when dealing with a late filed election, is patently unreasonable.
[32] In the end result, the application for judicial review must be dismissed.
ORDER
For the reasons stated above, the application for judicial review is dismissed.
"J.D. Denis Pelletier"
Judge