On 8 September 2006, the taxpayer made a request to the Minister to have the interest waived in respect of a tax debt that arose in 1989-90. The Minister denied the’ request on the grounds that the 2005 amendment to the waiver of penalty or interest provisions in subsection 220(3.1) of the Act limited his discretion to a 10-year period after the taxation year in which the original tax debt arose.
Subsection 220(3.1) states:
| || “The Minister may, on or before the day that is ten calendar years after the end of a taxation year of a taxpayer … waive or cancel all or any portion of any penalty or interest otherwise payable under this Act by the taxpayer … in respect of that taxation year…” (emphasis added) || |
Request for judicial review
The taxpayer made an application to the Federal Court Trial Division (FCTD) for judicial review of the Minister’s decision, arguing that the phrase “in respect of that taxation year” refers to each year during which interest accrues on an outstanding tax debt, no matter when the debt arose.
The FCTD dismissed the taxpayer’s application, noting that the term “taxation year” was interpreted in Montgomery v MNR (95 DTC 5032 (FCA)) to mean a year, either fiscal or calendar, for which tax is computed. The FCTD also agreed with the ruling in Telfer v Canada (Revenue Agency) (2009 FCA 23) that the time limit in subsection 220 (3.1) is for the 10 calendar years after the relevant taxation year — namely, the year of assessment.
Taxpayer successfully appeals
The FCA allowed the taxpayer’s appeal. It cited the well-known passage from Canada Trustco Mortgage Co. v. Canada, ( 2 S.C.R. 601, 2005 SCC 54) at paragraph 10, in which the Supreme Court of Canada set out the proper approach for interpreting taxation statutes:
| || The interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole. When the words of a provision are precise and unequivocal, the ordinary meaning of the words plays a dominant role in the interpretive process. On the other hand, where the words can support more than one reasonable meaning, the ordinary meaning of the words plays a lesser role. The relative effects of ordinary meaning, context and purpose on the interpretive process may vary, but in all cases the court must seek to read the provisions of an Act as a harmonious whole. || |
The FCA found that subsection 220(3.1) could be interpreted in more than one way, and therefore delved into its history, context and purpose. The Court concluded that the Minister’s interpretation would lead to a harsh result that would be contrary to its purpose of allowing taxpayers to ask for relief against penalties and interest and allowing the Minister to grant such relief where appropriate. The Montgomery case was distinguished, while the Telfer case was not mentioned.
The Court also noted that Parliament knows how to draft sections that have a forward-looking effect — for example, subsection 220(3.201) — and could have used similar language if that was its intention.
As a result, the FCA allowed the taxpayer’s application for judicial review, and referred his application for interest relief back to the Minister for reconsideration. While the Court held that the Minister possesses the ability to waive the interest in question, the decision of whether to do so remains at the Minister’s discretion. Having incurred the costs of a first- and second-level ministerial review, an FCTD judicial review and an appeal of the result to the FCA, the taxpayer still needs to convince CRA that a waiver of interest would be just and equitable.
The taxpayer won the battle, but he still has to win the war.
Although the Crown has not sought leave to appeal this decision to the Supreme Court of Canada, there may be some pressure exerted on the Department of Finance to reword subsection 220(3.1). This would be unfortunate.
As the FCA points out, the broader interpretation promotes fairness, and does not place an unnecessary administrative burden on the Crown. The Minister would only have to know the amount of the original tax debt upon which interest accrued, and what payments have been made and when. From there, the interest is determined by a simple mathematical calculation.