In a much-anticipated Federal Court of Appeal tax decision released last week, it’s clear that no mercy is being shown toward taxpayers who should have known better when it comes to tax compliance.
The case involved the controversial and exorbitant penalties for late-filing Form T1135, the “Foreign Income Verification Statement.” That’s the form Canadian taxpayers (including corporations) must file annually if they own foreign property worth more than $100,000. File that form late and you face an automatic late-filing penalty of $25 per day, to a maximum of $2,500 annually, plus arrears interest.
The FCA cases involve the Asper Group of Companies, which failed to file T1135 forms for six companies over the course of four years until asked to do so by the CRA.
The Asper Group’s troubles began in 2000, when its accounting firm incorrectly concluded that T1135 forms were not required where an investment portfolio was managed by a Canadian investment manager and was subject to Canadian tax reporting requirements. As a result, it stopped filing the forms beginning in 2000 until they were asked by the CRA to do so in 2005 for the 2000 to 2003 tax years. It should be stressed that during each of these years, the Asper Group fully reported and paid tax on all its foreign income.
The cases were first heard at the lower Federal Court in September 2010, when the group sought a judicial review of the CRA’s decision to deny its request for relief from penalties and arrears interest. The court had to decide whether the CRA’s decision not to forgive penalties and interest was reasonable.
The judge found that the CRA acted within its bounds to deny relief and thus the Asper Group found itself in the FCA last month requesting the court to review whether the lower court was correct in dismissing its application for a review of the CRA’s decision not to grant penalty relief.
In an interesting and unusual decision, the FCA first concluded that the CRA’s decision “falls outside the range of defensibility and acceptability and, thus, is unreasonable” because it relied solely on the CRA’s published administrative policy as to when to grant relief. Specifically, the policy, as published in CRA’s information circular, states that relief can only be granted if the penalty or interest arises either from extraordinary circumstances or is either mainly due to actions of the CRA or an inability to pay by the taxpayer.
The FCA said the CRA should instead be basing its relief decision on the Tax Act, which gives the CRA complete and unfettered discretion to cancel interest and penalties and is not limited to the three scenarios in its information circular.
Yet the FCA went on to state that despite the fact the CRA’s decision was unreasonable, “no practical end would be accomplished by setting aside the [CRA’s] decision and returning the matter back to [the CRA] for redetermination: the [CRA] could not reasonably grant relief on these facts.”
It found that the “excuses and justifications offered by the [Asper Group] for the delay in filing … have no merit” and returning the matter back to the CRA for reconsideration would be “an exercise in futility.”
The Asper Group also tried to argue that it was unfair for the CRA to levy six separate, sizeable penalties against the companies for each year when there was really only one mistake made by its accounting firm and thus the penalties should be substantially reduced.
The FCA said this argument has no merit, “smacking of a plea for a volume discount.” Since each company was a separate legal entity and a separate taxpayer, potentially subject to penalties and interest for its own non-compliance, each should have been capable of independent decision-making concerning which forms need to be filed.