What is the standard of review for discretionary decisions of the CRA appealed to the federal courts?

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.

The Canada Revenue Agency is an administrative body and, as a result, it may only exercise powers given to it expressly by statute, of which the provisions of the Income Tax Act are the most relevant to the majority of taxpayers.

The Minister of National Revenue is CRA's representative for the purposes of administering and enforcing the Income Tax Act and any mention of "the Minister" is in effect a reference to CRA. There are many sections of the Tax Act that direct the CRA to exercise its powers in a specific way in particular circumstances, often indicated by mandatory language such as "the Minister shall". However, there are also several provisions of the Tax Act which allow the CRA to decide whether or not to act, or how to act, in certain situations, usually containing phrases like "the Minister may". The presence of "shall" means that Revenue Canada has little leeway in deciding how to perform its duties under the Tax Act, whereas the use of "may" is strong evidence that the drafters of the Tax Act, Parliament, intended to give considerable discretion to the CRA in determining how to perform its income tax duties.

This article will analyze the standard of review applied by the Courts when undertaking a judicial review of certain discretionary decisions made by Revenue Canada under the Tax Act.

Discretionary decisions of the CRA are appealed to the Federal Courts

Discretionary decisions made by the CRA are appealed by an income tax lawyer to the Federal Courts, not to the Tax Court of Canada. This is because the Tax Court of Canada is a creature of statute, in other words it was created by the Canadian government through the legislative process, rather than through common law, and, accordingly, is only empowered to offer relief that is expressly set out in its constituting statute, the Tax Court of Canada Act, RSC 1985, c T-2. For example, when an income tax litigation lawyer appeals an assessment or reassessment to the Tax Court of Canada, the Court is limited by the in the ways in which it can deal with the appeal:

• The Tax Court judge may confirm the assessment or reassessment issued by the CRA;
• The Canada Tax Court judge can vacate the assessment, ordering the CRA to reconsider its decision and issue a reassessment to the taxpayer; and
• The Tax judge may also direct the Minister to reassess the taxpayer in accordance with his or her instructions, based on findings of fact determined at trial.

Additionally, the Tax Court and its judges are limited by the enabling statute to making decisions in accordance with the statutory provisions of the Tax Act. The Tax Court of Canada does not have the power to tell CRA what to do when the issue in question is within the Minister's discretion, and has no ability to make a decision based upon what it believes to be a fair and reasonable outcome for a given scenario. Essentially, the Tax Court judge is only capable of applying the law as written in the Income Tax Act as interpreted by binding authority of more senior courts. In summary, an income tax lawyer will appeal Canadian income tax assessments or GST assessments to the Tax Court.

On the other hand, the Federal Courts have either exclusive jurisdiction or concurrent jurisdiction with the provincial Superior Courts to adjudicate completely in areas of law in the federal sphere that fall within their statutory jurisdiction, such as taxation and immigration. The remedies that can be asked of, and granted by, the Federal Courts are extremely broad. The Federal Courts have the ability to grant "extraordinary" remedies in the form of prerogative writs, such as injunctions and mandamus orders, and the remedies available are often only limited by the imagination of the Canadian tax appeal lawyer requesting them. As mentioned above, the only power that a Tax Court of Canada judge has in terms of influencing the minister's discretion is to have the matter sent back to the minister to "reconsider". A judge of the Federal Court or Federal Court of Appeal, however, can issue a mandamus order directing the minister to act, or not act, in a specific way. In essence, a Federal Court judge can tell the Revenue Canada how to exercise its discretion if they believe the Minister has made an unreasonable or incorrect ruling, situations which are discussed in more detail below.

However, even though the remedies available from a Federal Court judge are broad, Canadian taxation lawyers face a high bar in persuading the Court to actually exercise their remedial powers on judicial review, as explained below.

Brief overview of leading Canadian cases concerning the standards for judicial review

Historically, the actions of Canadian administrative bodies were assessed using three standards of review: correctness, reasonableness and patent unreasonableness. However, in 2019, the Supreme Court of Canada released a landmark decision, Vavilov, 2019 SCC 65, which completely altered the landscape of the judicial review. Vavilov updates and refines the standard from Dunsmuir, overtaking the latter as the leading Supreme Court authority in this area. In Vavilov, the standard of review framework was simplified by the SCC, with patent unreasonableness, a malleable and often unhelpful standard, being dropped in favour of a two-pronged standard of review consisting of correctness and reasonableness.

According to the SCC in Vavilov, reasonableness is presumptively the standard of review. Under the reasonableness standard, a decision will be found reasonable and the reviewing court will uphold the decision if the administrative decision is justified in light of the factual and legal constraints, and the reasoning itself must be coherent, understandable and accessible.

However, the standard of correctness should be used in five exceptional circumstances: (1) statute explicitly provides for correctness standard, (2) statute provides a statutory appeal mechanism from an admin body to a court, (3) constitutional questions, (4) general questions of law of central important to the legal system as a whole, (5) questions related to the jurisdictional boundaries between multiple administrative bodies. With these types of administrative decisions, a reviewing judge will put themselves in the decision-maker's shoes and assess their actions based on what the judge believes to be the "correct" answer. No deference will be shown to the original decision-maker when a "correctness" standard is the applicable standard of review for a given decision.

The applicable standard of review for discretionary decisions of the CRA

The Federal Courts, which are responsible for review of the CRA as indicated above, have consistently applied the aforementioned judicial review framework from Vavilov to discretionary decisions made by the Revenue Canada under the Income Tax Act.

A reasonableness standard of review was applied by the federal court In Charky v Canada (Minister of National Resources), 2010 FC 1327, which concerned the review of a ministerial decision made under subsection 220(3.1) of the Tax Act, a provision applicable during the voluntary disclosure process. Subsection 220(3.1) gives the Canadian tax department the discretion to waive or cancel all or any portion of any penalties or interest that became payable by the taxpayer in the ten years preceding the taxpayer's voluntary disclosure application. In Charky, the CRA rejected a taxpayer's voluntary disclosure application for lack of voluntariness. In evaluating the Minister's decision, the Court was mostly concerned with whether the Minister "considered all the evidence before him fairly" and, having answered that question in the affirmative, concluded that the decision fell well "within a range of possible, acceptable outcomes", and was therefore reasonable.

Similarly, in Canada (Attorney General) v Abraham, 2012 FCA 266, the Federal Court of Appeal assessed a discretionary decision made by a delegate of the Canada Revenue Agency with respect to subsection 152(4.2) of the Tax Act using a standard of reasonableness. Subsection 152(4.2) allows taxpayers to apply to the Minister, subsequent to the normal assessment period, to have taxes, interest or penalties owed by the taxpayer with respect to a particular taxation year reassessed by the Minister, as long as the application is brought within ten calendar years of the end of the taxation year being put forth by the taxpayer for reassessment.

In Abraham, the Minister's delegate, after reviewing a taxpayer application for relief under 152(4.2), elected to deny the relief sought by the taxpayer. The Federal Court of Appeal showed a high level of deference to the delegate's decision; this, despite the fact that the delegate, in carrying out their analysis, was required to determine the taxpayer's rights in relation to the Indian Act, which is inarguably a question of law, before deciding whether or not to exercise their statutory discretion in favour of the taxpayer. The Court in Abraham was seemingly unconcerned with the legal component of the delegate's decision-making process in arriving at the conclusion that the applicable standard of review was reasonableness, and in support of its reasoning relied upon previous case law that held that the discretion granted by section 152(4.2) was to be interpreted "broadly".

These cases make it clear that the Federal Courts will respect discretionary decisions made by Revenue Canada and its delegates as long as decisions are reasonably transparent and not the result of bad faith or fraud.

Precedent not binding on the Minister

In order to properly exercise a discretionary power given to them by statute, administrative decision-makers actually have to exercise such discretion in considering the specific facts and circumstances of each case: they cannot fetter their discretion with established policies, "rules of thumb" or previous decisions. For example, CRA's Information Circular 07-1 ("IC07-1) lists some examples of situations which might amount to "extraordinary circumstances", the occurrence of which might entitle a taxpayer to interest or penalty relief under subsection 220(3.1) of the Tax Act. The examples listed in IC07-1 are:

• natural or man-made disasters, such as floor or fire;
• civil disturbances or disruptions in services, such as a postal strike;
• a serious illness or accident; or
• serious mental illness or distress, such as death in the immediate family.

In Canada v Guindon, the Federal Court of Appeal discussed the nature of the discretionary power given to the Minister under subsection 220(3.1) of the Income Tax Act and stated that the discretion "must be based upon the purposes of the act, the fairness purposes that lie behind subsection 220(3.1), and a rational assessment of all the relevant circumstances". The Court in Guindon also emphasized that such discretion "must be genuinely exercised and must not be fettered or dictated by policy statements such as Information Circular 07-1". For instance, if a taxpayer with a significant income incurred significant interest and penalties as a result of unpaid income tax and then subsequently lost their job, it would be an improper exercise of discretion if the Minister denied penalty relief solely because the taxpayer's circumstances were not mentioned in IC07-1. Such a taxpayer is not necessarily entitled to interest and penalty relief under 220(3.1), but the Minister is still required to fully consider the taxpayer's circumstances in exercising their discretion and avoid a mechanical application of policy guidelines such as IC07-1 in determining what is truly a fair outcome.

As mentioned above, the CRA agent cannot blindly cite CRA income tax policy without a consideration of the specific facts put before him or her by the taxpayer. However, relying heavily on published positions in the making of an administrative decision is not, on its own, proof that the resulting outcome is unreasonable. In Baker v Canada (Minister of Citizenship and Immigration), [1999] 2 SCR 817, the Supreme Court of Canada stated that it is an indicator of reasonableness for an administrative decision to comply with unchallenged policy statements and guidelines. Furthermore, the Federal Court of Appeal in Kane v Canada, (Attorney General), 2011 FCA 19, stated that an unexplained deviation from published policy statements by an administrative actor is a potential indicator of unreasonableness.

Because CRA is required to exercise its discretion by turning their mind to the facts of each case that comes before it, Revenue Canada is not bound by past decisions. This of course leaves open the possibility that two different taxpayers in similar circumstances could receive different treat under a discretionary provision such as subsection 220(3.1). However, as mentioned above, so long at the Minister's decisions were transparent and within the range of acceptable outcomes, the differential treatment will not be grounds for judicial review of the decision(s).

The Minister of National Revenue must apply CRA policy correctly

A distinct but related issue to the above is the degree to which the Canada Revenue Agency must comply with the explicit wording of a given policy statement in order for the resulting decision to be considered reasonable. The decision of the Federal Court in Lambert et al v AGC, 2015 FC 1236, suggests that, while CRA can base a decision largely on the application of a published policy position, it must abide by the strict wording of the policy statement or guideline. In Lambert, three taxpayers (Lambert, Sobey and Gillespie) each submitted several years worth of personal tax returns for income tax reassessment under subsection 152(4.2) of the Income Tax Act in order to take advantage of previously unreported losses they incurred in their horse training and racing operation, a taxable supply under the Tax Act. In declining to exercise their discretion to allow the taxpayers to be reassessed to include the farming losses, CRA relied on paragraph 87 of IC07-1, which reads as follows:

CRA policy does not allow for the reassessment of a statute-barred return if the request is made as a result of a court decision. Requests made to reassess a statute-barred return based only on the successful appeal by another taxpayer will not be granted under subsection 152(4.2).

The taxpayers all submitted their requests under subsection 152(4.2) approximately six months after the Supreme Court of Canada's decision in R v Craig, 2012 SCC 43, which each taxpayer mentioned explicitly in their accompanying submissions. In Craig, the Supreme Court interpreted subsection 31(1) of the Canadian Tax Act in a way that greatly expanded the situations in which business losses from a farming operation will be fully deductible. CRA therefore, recommended that all three requests under 152(4.2) of the Income Tax Act be denied because they were submitted as the result of a favourable court decision, Craig. All three taxpayers applied for judicial review of the decision.

The Federal Court ruled to allow Lambert and Sobey's judicial review applications, which were remitted back to the Minister of National Revenue for reconsideration and redetermination because the Court found that paragraph 87 of IC07-1 had been applied unreasonably by CRA. The Court relied heavily on the factual findings of the CRA agent, who seemed to accept Lambert and Sobey's assertions that they had previously been unaware that their horse racing operation was taxable as a business during the relevant years in question.

The Court took this to mean that there was evidence before the Canada Revenue Agency to suggest that Lambert and Sobey had filed their requests under subsection 152(4.2) not "only" because of the favourable decision in Craig, but also because they were trying to correct previous tax non-compliance due to a misunderstanding of their reporting obligations under the Canadian Tax Act. Manson J was also sympathetic to Lambert and Sobey's argument that, by "simply referring" to the Craig decision in their submissions, they were deemed to have solely relied on it. With respect to Gillespie, the Court again relied on the findings of the CRA officer, who did not accept that Gillespie was unaware that his farming operation was a taxable business according to Canadian tax law. Further, unlike Lambert and Sobey, Gillespie explicitly stated that his taxpayer relief application was submitted as a result of the Craig decision.

The Lambert case places a heavy onus on CRA officers to closely follow the strict wording of any published policy statements or guidelines that they rely on in the decision-making process. A failure to do so may result in a Federal Court judge deeming the resulting decision as an unreasonable application of the policy or guideline.

Hypothetical discretionary decisions within voluntary disclosure and taxpayer relief framework

A Canadian resident taxpayer with substantial unreported foreign assets invested overseas may decide to have his  tax lawyer prepare a Voluntary Disclosure application to the CRA, fearing the penalties and interest or prosecution that might follow if they are eventually audited or investigated by the CRA. Typically, Revenue Canada grants total penalty relief in addition to partial interest relief upon the filing of a successful voluntary disclosure. However, the granting of interest relief in a Voluntary Disclosure is discretionary and the taxpayer might not be satisfied with the amount of interest relief given by Revenue Canada. Since this is a discretionary decision, CRA's determination will be reviewed by the Federal Courts using a standard of reasonableness and our hypothetical taxpayer would face a high hurdle in having the Minister's decision overturned by the Federal Courts on judicial review, unless the reasoning of the decision is suspect and open to attack.

Now, imagine that same taxpayer, except in this scenario the taxpayer is audited and assessed for gross negligence penalties and interest for the 10 prior taxation years. If the amount of unreported foreign assets is significant, the associated penalties and interest payable by the taxpayer could easily be hundreds of thousands of dollars, perhaps even more. Such a taxpayer's tax litigation law firm might file a taxpayer relief application (formerly called a fairness application) and seek to have the penalties and/or interest owing reduced by demonstrating the disastrous effects paying them in full would have on the taxpayer's lifestyle.

If the Revenue Canada exercises its discretion to deny the quantum of relief desired by the taxpayer, any review of the Minister's decision is going to be assessed on a reasonableness standard by the Federal Courts. Absent the presence of bad faith on the behalf of the Minister, such a decision will likely not be interfered with so long as it falls within the "range of possible, acceptable outcomes".

Conclusion

In light of the governing SCC decision in Vavilov and the subsequent body of case law, it is clear that reviewing Federal Courts have become increasingly wary of striking down administrative decisions solely on the basis that they would have come to a different conclusion given the same set of facts. Because many of the powers given to the Minister in the Income Tax Act are discretionary, taxpayers have no right to the relief contemplated by the wording of the particular section and they certainly do not have the right to have ministerial discretion exercised in their favour.

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 on Taxpage. Photo David Rotfleisch courtesy Rotfleisch & Samulovitch P.C. Title image: iStock. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.