CRA Policy on Refunds from Late-Filed Returns Too Restrictive

Forbes Painting and Decorating Ltd. v. Canada (Attorney General) (2019 FC 160) provides the impression that the courts are losing patience with the CRA's restrictive policy on accessing corporate refunds associated with late-filed returns through the application of tax overpayments to another of the corporation's tax obligations. The CRA's policy limits such refunds to situations where there are extraordinary circumstances beyond the taxpayer's control that prevent the timely filing of tax returns. Previous case law has questioned the statutory basis for this restriction (for example, Cybernius Medical Ltd. v. Canada (Attorney General), 2017 FC 226 and Pomeroy's Masonry Limited v. Canada (Attorney General), 2017 FC 952); thus, when the issue arose in Forbes, the court offered a solution by ordering that the corporation's request for a reallocation be "returned to another delegate of the Minister [that is, a different CRA auditor] for redetermination in accordance with these reasons for judgment." Perhaps this judgment will speed up the implementation of the CRA's promise to reconsider its relief under section 221.2 ("A Potpourri of Issues in the Administration and Enforcement of the Income Tax Act," 2017 Conference Report, at 32:10-11).

In Forbes, the corporation failed to file its corporate tax returns on time for the 2006 and 2007 taxation years; it also failed to respond to the CRA's requests and demands to file. The CRA issued a notional assessment and collected the amount owing through garnishments. Subsequent filing of the returns showed that the garnishments were excessive but, since the corporation could not directly receive a refund (because the three-year period in subsection 164(1.5) had elapsed), the corporation requested that the statute-barred credit (SBC) amount be applied to its outstanding tax debt relating to payroll withholdings. The CRA refused this request, noting that there were no extraordinary circumstances that prevented the corporation from filing its returns within the three-year period. The corporation then sought a court review of the CRA's exercise of discretion.

The court began by accepting the submissions of both the corporation and the government that the appropriate standard of review was that of reasonableness. It then turned to the issue of whether the minister fettered (that is, restricted) her discretion by unduly relying on the "Re-appropriation of T2 Statute-Barred Credits Guide" (available on various commercial tax databases). The court noted Stratas J's conclusion in Stemijon Investments Ltd. v. Canada (Attorney General) (2011 FCA 299) that "[a] decision that is the product of a fettered discretion must per se be unreasonable." The court then quoted Pomeroy, which notes that the CRA guidelines emphasize whether extraordinary circumstances prevent the filing of the returns within three years and include only a brief section on other circumstances that might be considered. The crux of the issue is whether appropriate consideration was given to those other circumstances. In this case, the circumstances related primarily to the financial hardship experienced by the taxpayer as a result of the notional assessment and the lack of reallocation of the SBC amount:

There is no indication that the Minister considered this hardship in her delegate's decision. . . . It is not possible to discern from the record whether this factor was considered or weighed as an "other" circumstance in denying Forbes' re-appropriation request. In my view, this renders the decision unreasonable because it is not apparent or transparent that Forbes' financial hardship was a factor in the decision-making process.
The court concluded—relying in particular on the absence of any mention of this issue in the completed recommended resolution form sent to the CRA's headquarters—that the decision of the minister's delegate was not reasonable and thus set aside the decision. It will be interesting to see how this issue is resolved by the next delegate assigned to this matter.

Balaji Katlai
MNP LLP, Montreal
[email protected]

Canadian Tax Focus
Volume 9, Number 3, August 2019
©2019, Canadian Tax Foundation