Despite their best efforts, taxpayers may sometimes fail to comply with their obligations under the Income Tax Act (Canada) (the “ITA”) and incur interest and penalties as a result. In such circumstances, subsection 220(3.1) of the ITA provides the Canada Revenue Agency (the “CRA”) with broad discretion to waive interest and penalties imposed under the ITA within a 10-year limitation period. Although the ITA does not articulate the grounds upon which taxpayer relief will be granted, the CRA’s administrative guidance contained in Information Circular IC07-1R1 (the “Information Circular”) sets forth certain criteria which the CRA will typically consider when making such a determination.
In a relatively recent application for judicial review,[1] the Federal Court ruled that an owner-manager’s ignorance of his corporation’s failure to make adequate payroll remittances due to concealment by his staff amounted to “extraordinary circumstances” which may have warranted relief from interest and penalties. In this article, we provide a summary of the facts, the court’s reasoning and key takeaways from the court’s decision.
Background facts:
The taxpayers were an Alberta-based oilfield services company and a trucking and transportation company, each wholly owned by Mr. Schnell and his spouse. Between 1994 to 2012, Mr. Schnell oversaw the taxpayers’ business operations as their sole director.
In 2012, Mr. Schnell contemplated semi-retirement and hired a Chief Executive Officer (“CEO”) to oversee the management and control of both companies in his stead. The CEO, in turn, hired his own Chief Financial Officers (“CFO”) who reported directly to him. These individuals assumed their roles between 2012 to 2018, and Mr. Schnell took a significantly reduced role in the taxpayers’ businesses.
Prior to 2016, the taxpayers had a long history of compliance with their source deductions and remittance obligations under the ITA. However, following the CEO’s hiring, the taxpayers encountered financial difficulty and did not meet their payroll remittance obligations. In May 2018, Mr. Schnell first became aware of the taxpayers’ failure to make the necessary remittances and he terminated the CEO and CFO who had concealed these remittance issues from him. Further, Mr. Schell promptly entered into a payment arrangement with the CRA to address this issue and was ultimately able to make full payment by January 2020 using his own personal funds.
The taxpayers subsequently made a joint taxpayer relief application for the 2014 to 2018 taxation years, inclusive, on the basis that Mr. Schnell was unable to address the taxpayers’ compliance issues because he had been unaware of them as a direct result of the mismanagement of his executive staff. The CRA only granted interest relief for the period where the payment arrangement was in place and denied the balance of the taxpayers’ requests. It took the position that Mr. Schnell, as the sole director of the taxpayers, remained responsible for all source deductions. The taxpayers brought an application for judicial review of the CRA’s final decision.
The decision:
The court found that the CRA’s decision to refuse the application for taxpayer relief was unreasonable. In particular, it found the following three aspects of the CRA’s decision particularly troubling:
- The CRA concluded that Mr. Schnell, as the taxpayers’ sole director, was responsible for not taking steps earlier to learn of the remittance arrears;
- The CRA stated that extraordinary circumstances preventing compliance by the taxpayers could not persist over several years; and
- The CRA found that the former CEO and his associates had no responsibility for the remittance arrears which accrued for the taxpayers after they had been terminated.
On the first issue, the court ruled that the CRA had neglected to address the impact of the CEO’s mismanagement on the taxpayers’ finances and the fact that he had concealed the extent of the taxpayers’ non-compliance from Mr. Schnell since 2016. The court also identified instances in the record where the CRA acknowledged that Mr. Schnell had not been privy to the taxpayers’ remittance issues until 2018, and accordingly, the CRA’s finding that Mr. Schnell was in control to make source deductions on behalf of the taxpayers was logically inconsistent.
The court further held that there was no temporal limitation to extraordinary circumstances. It referenced the fact that the Information Circular contemplates that extraordinary circumstances may persist for an extended period of time (e.g., in instances of prolonged illness). Accordingly, the CRA’s conclusion that the taxpayers’ circumstances could not be extraordinary because they lingered over a period of time was not internally coherent with its own administrative guidelines.
Finally, the court found the CRA had committed a reviewable error by concluding that the termination of the CEO in 2018 could not impact the taxpayers’ financial circumstances in subsequent taxation years. Despite finding that there was a causal link between the hiring of the CEO and the taxpayers’ failure to meet their remittance obligations, the CRA did not acknowledge that the adverse consequences of the CEO’s actions did not immediately end with his termination but continued long after because the taxpayers no longer had the requisite financial resources to rectify their remittance issues.
On the whole, these factors led the court to conclude that the CRA’s refusal to grant taxpayer relief was unreasonable and it remitted the matter to the CRA for further consideration.
Conclusion
The court’s decision is perhaps unsurprising given the taxpayers’ longstanding history of tax compliance and the efforts undertaken by Mr. Schnell to rectify these issues at great personal cost. The decision should provide some comfort to taxpayers who have been misled by their staff or advisors, and who have taken immediate and substantive steps to address areas of non-compliance with the ITA. These circumstances may amount to “exceptional circumstances” within the meaning of the Information Circular, which would justify taxpayer relief.
Should you require assistance pursuing an application for taxpayer relief or have any questions, please do not hesitate to contact a member of the Miller Thomson LLP Corporate Tax group.
[1] Maverick Oilfield Services Ltd. v Canada (Attorney General), 2023 FC 1728 [Maverick Oilfield].
