Canada: Penalty dispute: FC or TCC?
25 August 2014
Posted by: Author: John G. Bassindale
Authors: John G. Bassindale and Robert G. Kreklewetz (Millar Kreklewetz LLP)
Late in 2013, the FCA in JP Morgan (2013 FCA 250) provided significant guidance on the jurisdictional divide between the TCC and the FC on tax matters. The divided jurisdiction, which has long been a source of complication and confusion, may result in a taxpayer’s filing in the wrong court and losing the right of appeal. The recent FCA decision in Sifto (2014 FCA 140) is a useful indication from the FCA of how its principles in JP Morgan apply to slightly different facts.
In 2007, the taxpayer submitted a voluntary disclosure application for income tax purposes regarding the transfer price of rock salt that it had sold to a related US corporation. According to the published terms of the voluntary disclosure program, if the minister accepts an application, she waives and cancels all otherwise applicable penalties and does not prosecute the taxpayer for any offences. In early 2008, the minister accepted the taxpayer’s voluntary disclosure and later entered into settlement agreements with the taxpayer based on a mutual accord reached by CRA and IRS officials. In a surprising move, the minister said that she did not consider herself bound by the settlement agreements or the accepted voluntary disclosure and reassessed the taxpayer and, inter alia, imposed penalties.
The taxpayer filed two applications for judicial review in the FC: the first challenged the minister’s decision to assess the penalty and requested that the assessment be invalidated, and the second sought a declaration that the minister was bound by the settlement agreements. (The second application was withdrawn before the hearing of this appeal in Sifto.) The minister’s motion to strike the applications as bereft of any possibility of success was dismissed by a prothonotary, and the minister’s appeal to the FC was dismissed. The minister appealed to the FCA and relied on the intervening FCA decision in JP Morgan. Pending the minister’s appeal to the FCA on her motion to strike the taxpayer’s original applications for judicial review, the taxpayer appealed the relevant reassessments (including penalties) to the TCC.
The FCA said that a motion to strike fails unless the application for judicial review is clearly improper because it is bereft of any possibility of success. The FCA also said that the facts alleged in the taxpayer’s original applications for judicial review were assumed to be true for the purposes of the motion to strike (and related appeals). The court briefly noted the well-settled standard of review and said that the TCC did "not have the jurisdiction to determine whether the Minister properly exercised his or her discretion” to waive or cancel penalties under the Act; that was essentially the purpose of the original judicial review applications, and therefore they had been made to the correct court (the FC). Moreover, any challenge to those applications could only be made through the FC. (The FCA also said that on hearing an appeal, the TCC may be required to determine whether the statutory conditions for the penalty’s imposition were met and whether the reassessments failed to comply with the settlement agreement or the agreement reached by the CRA and the IRS under the Canada-US treaty.)
The minister also complained that the relief sought by the taxpayer was outside the FC’s jurisdiction because the FC was unable to invalidate an assessment: the FCA agreed, but it concluded that the FC had the power to declare that the minister acted unreasonably in failing to waive the penalties and other remedies preliminary to the power to invalidate an assessment. The FCA concluded that even if the relief requested was not precisely within the FC’s jurisdiction, "the Federal Court has ample scope for permitting amendments if required to ensure that the actual dispute is properly before the Court.” In the result, the Crown’s motion to strike was dismissed. The FCA said that it may or may not be preferable or necessary to defer the hearing of the original application for judicial review to the FC until after the hearing of the TCC appeal, but that was a case management matter that should be left to the FC.
Sifto echoes the FCA’s comments in JP Morgan regarding the need to read the application "holistically with a view to understanding its essential character, rather than fastening on matters of form.” Unlike JP Morgan, Sifto applied the holistic approach in the taxpayer’s favour. In JP Morgan, the FCA rejected the taxpayer’s pleading even though it was cast as an administrative law matter (and thus would have been correctly before the FC), but the application of the holistic approach in Sifto allowed what was perceived as essentially an administrative law matter to proceed despite some deficiencies in the statement of relief sought.
Although it is not clear from the record, the minister’s appeal to the FCA may have been partly based on its comments in JP Morgan that a departure from administrative policies is not by itself an abuse of discretion that is subject to judicial review. Part of the taxpayer’s application in Sifto claimed that the minister was bound to waive penalties once she accepted a voluntary disclosure, and the minister may have hoped that the FCA would strike the taxpayer’s application for judicial review on the basis that that departure from administrative policy was not an abuse of discretion. The FCA did not reflect on its earlier comment. However, the TCC has no jurisdiction to consider whether the minister properly exercised her discretion regarding a waiver, and in the circumstances we are of the view that it was appropriate for the FCA to allow the taxpayer’s complaint to be considered on its merits before the FC.
This article first appeared on ctf.ca.