Ottawa, Ontario, June 13, 2007
PRESENT: The Honourable Mr. Justice Phelan
BETWEEN:
and
THE MINISTER OF NATIONAL REVENUE
REASONS FOR JUDGMENT AND JUDGMENT
I. INTRODUCTION
[1] The Applicant, thinking he was covered under the Voluntary Disclosure Program (VDP), disclosed unreported taxable income. He was subsequently advised that he did not qualify for the Program’s protection. As a result, he will be liable not only for tax and interest but also penalties and potentially criminal prosecution.
[2] This is the judicial review of the Canada Revenue Agency’s (CRA) decision upholding the decision to deny Mr. Wong the benefits of the VDP – relief from penalties and prosecution.
II. FACTUAL BACKGROUND
A. Overview of the VDP
[3] Section 220 (3.1) of the Income Tax Act gives the Minister of National Revenue a broad discretion to waive or cancel penalties otherwise payable. The purpose of the VDP is to promote compliance with both the Income Tax Act and the Excise Tax Act by encouraging the disclosure of information that ought to have been previously reported. The Minister urges taxpayers to come forward under the VDP by promising to waive penalties or grant relief from prosecution if the taxpayer meets the conditions for making a valid disclosure.
[4] The VDP has four essential conditions set forth in Information Circular 00-IR:
· the disclosure must be voluntary;
· the disclosure must be complete;
· the disclosure must involve a penalty; and
· the disclosure must include information that is at least one year past due or if less than one year past due, not initiated simply to avoid the late filing or instalment penalties.
[5] The voluntariness condition is described more fully in the Information Circular – which is available to the public – as follows:
The disclosure must be voluntary. The client has to initiate the voluntary disclosure. A disclosure may not qualify as a voluntary disclosure under the above policy if it is found to have been made with the knowledge of an audit, investigation or other enforcement action that has been initiated by the CCRA, or other authorities or administrations with which the CCRA has information exchange agreements.
[6] CRA also has Voluntary Disclosure Program Guidelines – this publication is not available to the public. The Guidelines are to assist the officers making decisions on the validity of voluntary disclosures.
[7] While Guidelines are not law, they give information as to government bodies’ thinking, policies and practices. These Guidelines contain a number of provisions relevant to this judicial review. The starting point is that VDP officers are required to deal with all facets of the file. Further provisions detail important steps and rationale.
(a) 8.1.1 General
The VDP officer, like all employees of the CCRA and the Government of Canada, has a statutory obligation to enforce the law. Once a client provides the details of a disclosure, the VDP officer must act on that information. As a result, one of the most important steps in the voluntary disclosures process is to educate clients on the implications of making a voluntary disclosure before details of a disclosure are shared. This step is not only to maintain good client relations and to avoid unpleasant surprises, it is also a client’s right to understand the possible implications of making a voluntary disclosure. The “Client Agreement Form”, VDP-1, in Appendix A is designed to assist in this process and may be used with all disclosures.
(Underlining by the Court)
(The VDP-1 Form was not used as a matter of policy in the Saskatoon CRA office)
(b) 8.1.2 Conditions for a Valid Voluntary Disclosure
... The client must be advised that, if any conditions that would invalidate a disclosure come to light, the client may become subject to penalties on the entire amount, and to prosecution, if applicable.
(c) 8.1.4 Other Questions
The VDP officer should answer any general questions the client may have, as well as discuss the client’s disclosure situation in general terms so that the client is fully aware of penalty and other implications.
(d) 8.3.8 Interim Notification
Within 30 calendar days of the date the client provided all disclosure information, the client should be notified whether or not we will consider the disclosure to be “voluntary”. ... If the voluntary decision is being communicated and the disclosure needs to be referred to Audit for completeness, the client should be made aware that the current acceptance is conditional based on a further determination of the completeness of the disclosure.
[8] The Guidelines also deal with the situation where a VDP officer discovers that enforcement action has been taken. The disclosure may still be “voluntary” and the Respondent puts considerable emphasis on this aspect. The Guidelines require the VDP officer to consider:
· Was any direct contact made with the client or is the client likely to have been aware of the enforcement action?
· Is it likely that the CCRA would have uncovered the information being disclosed based on this enforcement action?
If the answer to either of these questions is “NO”, the disclosure may be considered voluntary. Clients should be given the benefit of the doubt.
B. Specific Facts
[9] In these proceedings Mr. Wong filed an affidavit setting out the facts from his perspective and was subject to cross-examination. The Respondent put in no such evidence from the officers who dealt directly with Wong. This is particularly important in respect of what was said and done at the time of his disclosure to CRA officials.
[10] Wong ran a sole proprietorship, “Charlie’s Seafood Market”, a retail seafood business. On September 14, 2005, Ms. Chrun of the CRA informed Wong that his GST return for the first quarter of 2005 had been selected for audit. It seems that Wong’s purchase of a Smart Car attracted public attention in the press and at CRA.
[11] On the same day Wong called CRA regarding the VDP which he had heard about on the radio. He spoke to a representative, whose name he could not recall, who asked whether he (Wong) was under investigation for fraud. Wong replied “No” and was instructed to speak to Chrun.
[12] On September 15, 2005, Wong contacted Chrun about voluntary disclosure. She advised him that he would have to see if he qualified. Chrun then contacted Frank Metanchuk, the VDP officer, as to whether Wong qualified under the VDP.
[13] Chrun then telephoned Wong to advise him to check the CRA website and to inform him that he would not qualify for the VDP for 2005 because there was an audit. From this call, its nature and content, Wong understood that he qualified for the VDP for the years other than 2005. His affidavit evidence is that Chrun told him that since she was reviewing the 2005 year, he did not qualify for the VDP for 2005 but that disclosing for period prior to 2005 would be “okay”. There was no warning as to the negative consequences associated with making a voluntary disclosure.
[14] The following day Wong contacted Metanchuk to inform him that he wanted to make a voluntary disclosure. Wong was given no warning nor was he advised that voluntariness might be an issue despite CRA officials’ knowledge of all the facts concerning the existence of the 2005 audit. Lastly, Wong was not asked to sign or advised of the existence of the VDP-1 form. It was not the practice of the Saskatoon office to use this form of consent.
[15] Wong, having said that he qualified for the VDP and having received no indication of any problems about his qualification, proceeded to disclose that he had unreported income for the years 2000-2004 from his wholesale business.
[16] On the same day Wong formalized his request for inclusion in the VDP on the assumption that he had met the test of “voluntariness” for the years other than 2005. Given what had transpired, Wong understood that his only area of risk in regard to the Program was ensuring that he made complete disclosure.
[17] Thereafter, Wong had several meetings and discussions with CRA officials which, from Wong’s perspective, were centred on ensuring that his disclosure was complete.
[18] The first hint of possible trouble was on December 7, 2005 when Metanchuk informed Wong that disclosure might not qualify because of recent enforcement action.
[19] On June 1, 2006, Wong was advised that he did not qualify for the VDP because enforcement action had begun prior to his disclosure. In the briefing notes for this First Decision, in the recitation of the facts, there is no reference to the assurance that disclosure for other years would be “OK” nor is there any reference to the failure to follow the Guidelines as to warnings and consequences of disclosure. There is a somewhat equivocal finding that the auditor would have uncovered the information in the course of the audit.
[20] Wong then sought a Second Level Review. That review was a paper review – a review of the file. In order to prepare the recommendation, the person conducting the paper review never interviewed any of the participants but discounted Wong’s version of events because the file notes did not coincide with his evidence.
[21] The Second Level Review Decision confirmed the First Decision, denied that CRA officials misled Wong and concluded that it was the auditor’s contact which had motivated disclosure of unreported income.
[22] This is the decision which is subject to judicial review.
III. ANALYSIS
[23] The parties have raised several issues which can be more conveniently described as:
(a) Whether an adverse inference can be drawn from the Respondent’s failure to provide evidence from persons with personal knowledge of the facts.
(b) Was the decision reasonable?
(c) Was there a breach of procedural fairness?
(d) Was there a breach of contract between CRA and Wong?
(e) Is CRA estopped from denying Wong’s request for relief?
(f) Was the information disclosed on a “without prejudice” basis?
A. Standard of Review
[24] If this case were to turn on the decision itself rather than how it came about, the standard of review would be “reasonableness” (see Lanno v. Canada (Customs and Revenue Agency), [2005] F.C.J. No. 714 (QL)). However, this case turns on how Wong was treated which raises issues of law and fairness for which the standard is correctness.
B. Adverse Inference
[25] This is not a situation where the Court need draw an adverse inference from the Respondent’s failure to file evidence to rebut Wong. The Respondent’s choice not to challenge Wong’s evidence by contrary evidence simply means that, subject to admissions on cross-examination, Wong’s evidence is the only evidence on the issues of estoppel and fairness.
[26] The Respondent’s choice not to interview any of the key government participants in the face of Wong’s allegation raises issues as to the quality of the Second Level (and First) Decision.
C. Fairness
[27] The overriding issue in Wong’s disclosure is its voluntariness including whether he knew or ought to know the consequences of his disclosure. The CRA Guidelines are replete with references to ensuring that people are treated fairly and know their rights before making disclosure.
[28] The Saskatoon office did not follow those Guidelines. While they are entitled to ignore the Guidelines, they do so at their peril. The simple presentation of the VDP-1 form might have eliminated all the problems in this proceeding.
[29] The level of procedural fairness owed is minimal but, as is recognized in the Guidelines, a person is entitled to know the consequences of what they are about to embark upon before they take an irretrievable step. Wong received neither the warnings nor the advice that the Guidelines call for. That failure to accord minimal fairness led to the highly prejudicial disclosure.
[30] CRA officials could have been under no illusions that Wong believed he was entitled to VDP protection when he made his disclosure on September 16, 2005. To sit silently by and allow Wong to continue under this illusion, as he attempted to provide complete disclosure, until December 7, 2005 when “voluntariness” was raised as a possible issue was profoundly unfair. However, the key point was on September 16, 2005, because after that encounter the “genie could not be put in the bottle” – CRA knew about his wholesale business and some of his customers.
D. Decision/Reasonableness
[31] The conclusion that Wong made his disclosure because of a forthcoming audit avoids the critical issue and analysis. That conclusionary analysis stops at the question of why Wong approached CRA. The analysis did not include a thorough review of his reasons for making the actual disclosure – that he was induced to make this disclosure. As of September 16, 2005, CRA knew all the facts about the existence of an audit; the only critical fact outstanding was completeness.
[32] Given that Wong alleged inducement, a file review without interviews of the active participants at the critical time and the finding that Wong’s recitation of the facts was in error because they are not reflected in file notes, is unreasonable.
[33] The finding that the auditor would have found the undisclosed evidence is an easy finding to make in hindsight. It is not immediately obvious that an audit of GST credits would reasonably lead to the undisclosed income but, on this point, the CRA has greater expertise than this Court. Scepticism is not sufficient in this case to lead to a conclusion that this finding is unreasonable.
E. Estoppel
[34] The applicability of the principles of promissory estoppel in the context of VDP disclosure has been confirmed by Strayer D.J. in Karia v. Canada (Minister of National Revenue – M.N.R.) (F.C.), 2005 FC 639.
[35] The requirements of promissory estoppel are (1) a promise that the promisor will conduct himself in a certain way in given circumstances; (2) reliance on that promise; and (3) action on the promise to the promisee’s detriment/or promisor’s benefit.
[36] The promise is contained in the Information Circular, in the comments by Chrun, and is compounded by the knowing silence of Metanchuk when Wong said he qualified and then began to make disclosure. If there was any serious doubt that the audit, its existence known to these officials, might be an impediment, they could and should have disclosed that fact.
[37] CRA officials knew (or ought to have known) that Wong believed that, except for the audit which eliminated 2005 from the VDP protection, he was under the VDP as long as he kept his end of the bargain and made complete disclosure.
[38] While the facts in Karia are different where the taxpayer had a letter indicating conditional acceptance into the program, the essential qualification of a promise exists in Wong’s case; partly in writing, partly orally and lastly by acquiescence.
[39] The Respondent suggests that Wong was knowledgeable about the VDP when he made contact and presumably knew all the risks of disclosure. It is unreasonable to conclude that a person knowledgeable about the VDP (and therefore knowledgeable that there was an issue of voluntariness) would commit tax “suicide” and confess to undisclosed income without a belief that he had obtained a promise of protection.
[40] There is no suggestion of any other grounds to deny Wong protection under the VDP.
[41] This issue can be determined in two ways:
(1) that the existence of promissory estoppel is a matter of law to which no deference is owed. The legal conditions for its application are met.
(2) that the finding that Wong was misled is at least a question of mixed law and fact and the finding that Wong was not misled is unreasonable or if greater deference is owed, the decision of the Respondent is patently unreasonable.
IV. CONCLUSION
[42] I need not decide the issues of contract or “without prejudice disclosure”. They were also not issues raised in the Second Level Review.
[43] I therefore find that the Respondent is estopped from denying that the Applicant is entitled to be considered as having met condition 6(a) of the Information Circular 00-IR in effect on September 16, 2005.
[44] This application for judicial review will be granted with costs, the decision of September 11, 2006 will be quashed, and the matter remitted back with a direction that the disclosures of the Applicant be treated as voluntary and his request for inclusion in the VDP be re-determined on that basis.
JUDGMENT
THIS COURT ORDERS AND ADJUDGES that this application for judicial review is granted with costs, the decision of September 11, 2006 is quashed, and the matter is remitted back with a direction that the disclosures of the Applicant are to be treated as voluntary and his request for inclusion in the VDP is to be re-determined on that basis.
FEDERAL COURT
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-1797-06
STYLE OF CAUSE: CHARLIE WONG
and
THE MINISTER OF NATIONAL REVENUE
PLACE OF HEARING: Saskatoon, Saskatchewan
APPEARANCES:
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Mr. Beaty F. Beaubier Ms. Laura P. Barrett
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Ms. Karen Janke
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SOLICITORS OF RECORD:
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STEVENSON HOOD THORNTON BEAUBIER LLP Barristers & Solicitors Saskatoon, Saskatchewan
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MR. JOHN H. SIMS, Q.C. Deputy Attorney General of Canada Saskatoon, Saskatchewan |