Canadian taxpayer involved in a bad will investment scheme granted additional relief on accrued interest

Introduction

David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm.

In Barrs v The Queen et al, the taxpayer, Mr. Randall Barrs, appealed to the Federal Court of Appeal after the Federal Court dismissed his application for judicial review of the Canada Revenue Agency's (CRA) decision to deny him additional relief from accrued interest.

In 1984, Mr. Barrs and other individuals invested in a scheme that promised tax savings in the form of flow-through losses and various deductions claims. The CRA disallowed the claims based on fraud. Several investors including the taxpayer, then challenged the reassessments.

In 2004, a group of taxpayers impacted by the CRA decision made an interest relief request under s.220(3.1) of the Income Tax Act, which grants the CRA discretionary power to waive off interest and penalties under certain conditions. However, Mr. Barrs was not one of them.

In 2005, s.220(3.1) was amended to place a 10-year limit on interest relief available, however, there was no time limit before this amendment.

Although the Tax Court of Canada dismissed the group of taxpayers' appeal in 2014, the CRA granted relief from interest that had accrued over 168 months to these taxpayers who made their relief applications in 2004.

Because Mr. Barrs and other taxpayers only filed their relief from interest in 2014, the CRA granted them relief for interest accrued over 51 months instead of 168 months.

After a second review request, the CRA then granted Mr. Barrs an additional 12 months of relief from interest.

Mr. Barrs then made a third-review request to the CRA that he should be awarded interest relief over 168 months to ensure equity with the taxpayers who made their relief requests in 2004.

After the CRA denied Mr. Barrs his third request, he appealed to the Federal Court, that sided with the CRA.

The Federal Court of Appeal found that the amended s.220(3.1) was not a complete answer to Mr. Barrs' claim for equitable treatment, and it was open to the CRA to grant additional relief from interest. Therefore, the Federal Court's decision was set aside.

The Federal Court applied the reasonableness standard and sided with the CRA

The one issue in Mr. Barrs' case that didn't arise in the other taxpayers' case, who also filed the relief request in 2014, concerns a request for equitable treatment who received greater interest relief because they made the request in 2004. By the time Mr. Barrs' appeal to the Federal Court of Appeal was heard, all other taxpayers who made request in 2014 had settled their cases with the CRA.

Regarding the issue of inequality in treatment between the two groups of taxpayers, the Federal Court determined that the independent third-level review officer's treatment of the issue was reasonable.

The court then confined its consideration of the issue to a discussion of the impact of the 10-year limitation period in s.220(3.1) of the Income Tax Act without considering all the other arguments advanced by Mr. Barrs.

The Federal Court of Appeal found s.220(3.1) was not a complete answer to Mr. Barrs' request for relief

The Federal Court of Appeal found the Federal Court was correct in selecting the reasonableness standard of review. However, it found the Federal Court erred in the application of that standard to the independent third-level review officer's treatment of Mr. Barrs' request for equitable treatment.

Although s.220(3.1) of the Income Tax Act prevents the CRA from granting relief from interest that accrued during taxation years before the 10 years preceding the date the application for review was made, this 10-year limitation was not a complete answer to Mr. Barrs' claim for equitable treatment. It may be open to the CRA to grant him additional relief from the interest accrued from 2004 onwards to promote equity with the group that requested relief in 2004.

In addition, the Federal Court of Appeal found Mr. Barrs' claim for equality was not frivolous.

In light of the interest rates that have prevailed since the tax debt arose, Mr. Barrs was faced with an interest bill that far exceeded those of the taxpayers who made their requests in 2004.

Yet, they all invested in the same scheme and had their claims for interest relief examined by the same review officers based on the same facts. Therefore, the Federal Court of Appeal allowed Mr. Barrs' appeal and remitted his request for relief to the CRA.

Relief beyond the statute of limitation is still possible

In this case, although there was a ten-year limitation imposed by the amended s.220(3.1) of the Income Tax Act, the court found that it was not a complete answer to the taxpayer. Therefore, relief requests beyond the statute of limitation may still be available depending on the circumstances. Since the CRA is generally reluctant to grant a taxpayer relief application, it is highly recommended that a taxpayer consults with an experienced tax lawyer regarding interest relief beyond the normal 10-year period.

David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm and is a Certified Specialist in Taxation Law who has completed the CICA in-depth tax planning course. He appears regularly in print, radio and TV and blogs extensively.  

With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, cryptocurrency traders, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax audit representation and tax litigation. Visit www.Taxpage.com and email David at david@taxpage.com.

Read the original article in full on Mondaq. Author photo courtesy Rotfleisch & Samulovitch P.C.