FC emphasizes sparing use of tax remission orders in Internorth case
TAX ALERT |
Remission orders allow taxpayers to obtain relief from tax obligations imposed by the Canada Revenue Agency (“CRA”). However, they have historically been seldom used and rarely successful. In Internorth Ltd v. The Minister of National Revenue (“Internorth”), the Federal Court (“FC”) was asked to review the CRA’s decision not to recommend tax remission of Internorth Ltd’s tax liability. This case reaffirms the extraordinary nature of remission orders.
Background on tax remission orders
Tax remission orders are a taxpayer’s measure of last resort for obtaining relief from tax obligations. Under subsection 23(2) of the Financial Administration Act (“FAA”), “the Governor in Council may, […] remit any tax or penalty, including any interest paid or payable thereon, where the Governor in Council considers that the collection of the tax or the enforcement of the penalty is unreasonable or unjust or that it is otherwise in the public interest to remit the tax or penalty.” Because remission orders are highly discretionary, they are rarely used and generally only apply in exceptional, extraordinary circumstances after a taxpayer has exhausted all other possible avenues of tax relief. As such, the chances of a successful remission order are low.
Further, statistics suggest that taxpayers are less and less likely to request remissions to alleviate tax burdens. Data (Samuel Singer, “Remission Orders as a Canadian Tax Debt Relief Vehicle”, Dalhousie Law Journal [forthcoming fall 2019]) shows that the number of remission requests has been trending downwards. From 2008 to 2018, excise and GST/HST remission requests were almost halved (91 requests) when compared to the previous period from 1997 to 2007 which counted 186 requests. Similarly, while no specific information was available as to the total number of remission order applications received on the income tax side, the number of cases presented to the Legislative and Policy Directorate, which is responsible for income tax remissions, saw remission requests drop from 23 in 2015-2016 to 19 in 2017-2018.
That remission orders may not be decided on a principled basis further muddies the waters. See our previous tax alert on audit agreements explaining that settlements with the CRA must be concluded on a principled (e.g., statutory) basis. As one study notes, the most common reason for requesting remission orders is to grant debt relief for financial hardship and/or extenuating circumstances, which are not principled bases for resolving a tax dispute. In light of the uncertainty, academics continue to call for reform of the remissions regime.
In 2003, the applicant Internorth Ltd. was incorporated to manage construction and development related projects. At that time, Internorth Ltd. was issued a notice of assessment by the CRA for failure to remit source deductions. In June 2004, Internorth Ltd. filed a timely notice of objection to prompt a closer investigation into the correctness of the assessment. However, a year and a half later in Nov. 2005, the CRA confirmed that the source deduction assessment was still valid. Internorth then had 90 days from the Nov. 2005 notice (which affirmed the assessment) to appeal to the Tax Court of Canada (“TCC”) but failed to do so. Separately, in April 2007 the CRA issued a notice of assessment against Internorth Ltd.’s only director in his personal capacity on account of unremitted Internorth Ltd. source deductions. The appeal was decided in favour of the director and it was confirmed that the director in his personal capacity was not liable for any tax payments because Internorth Ltd. did not have any employees.
In June 2014, Internorth Ltd. submitted an application for remission of source deductions based on the fact that it had no employees and after a review, the Minister’s Remission Committee recommended denying the remission application.
The court’s decision
At issue in the Internorth case was whether the Minister’s denial of the remission application was reasonable.
Internorth Ltd. argued that the denial was unreasonable because it did not have any employees at the time and thus could not have owed source deductions. Further, Internorth Ltd. contended that it ceased operations because of the CRA’s collection actions and therefore could not have filed an appeal to the TCC for the Nov. 2005 notice. Finally, Internorth Ltd. also asserted that the dismissal of the personal assessment against the director applied to it as well because he was the sole shareholder and director of Internorth.
The Minister responded by arguing among others, that the decision in the case against the director did not apply to Internorth Ltd. because the cases were separate. The CRA also replied that Internorth Ltd. contradicted itself by claiming on the one hand that the CRA’s actions caused it financial hardship forcing it out of business yet on the other hand, that it never had employees so it did not owe source deductions.
In the FC decision, referring to the spirit of the FAA, Justice Diner emphasized the discretionary and extraordinary nature of remission orders. He cited the CRA Remission Guide that “all means available within the legislation should be exhausted before remission relief is considered”.
Importantly, Justice Diner pointed out that the remission process should not be used to override or bypass a tax assessment especially when Internorth Ltd. could have appealed the original assessment to the TCC. The court’s responsibility was solely to review the case for reasonableness, not correctness or fairness. “The correctness of the tax assessments that caused the tax debt is beyond the jurisdiction of this Court”. Only the TCC has the authority to review the correctness of an assessment. On this basis, because the FC was reviewing the case for reasonableness of the Minister’s denial, Internorth Ltd.’s arguments on the substantive matter, i.e. that it did not owe source deductions because it did not have employees, were not applicable.
The FC rejected Internorth Ltd.’s argument that the dismissal of the case against the director equally applied to Internorth Ltd. Justice Diner held that the director’s case concerned the substantive matter of the tax liability, whereas the current Internorth case concerned the reasonableness of the remission process. Justice Diner also pointed out that Internorth Ltd. did not provide any reasons or cite any precedent for why cessation of operations prevented it from filing an appeal to the TCC. The court therefore ruled in favour of the CRA.
Conditions for a successful remission remain unclear
The Internorth decision reminds taxpayers that remission orders are highly discretionary and rare. Coupled with their extraordinary nature, taxpayers should consider that remission as a means of tax debt relief is very limited.