A recent case dealt with how the CRA applies the fairness provision found in subsections 220(2.1), 220(3) and 220(3.1) of the Income Tax Act [Dorothea Knitting Mills Limited (2005 FC318)]. In this case, the taxpayer had filed the appropriate Scientific Research & Economic Development ("SR&ED") forms with the CRA. Unfortunately, they filed the supporting technical information after the specified period within which it was supposed to have been filed. The CRA disallowed the SR&ED claim because of the failure to file all of the information by the due date, in accordance with the Income Tax Act.
Under the provisions of subsection 220(2.1), the taxpayer requested ministerial discretion to allow late filing of certain information. A Minister's delegate advised the taxpayer that they would not exercise their discretion to reinstate the claim. The CRA advised that the Income Tax Act allows the Minister to exercise ministerial discretion only where there are extenuating circumstances for late filing, the claimant took reasonable steps to comply with the law, or the claimant acted on incorrect written information provided by the agency.
The Court stated that "It is not clear where these criteria come from," and that these criteria are "not found anywhere in the legislation." CRA administrative policy has developed these three criteria. The Court stated emphatically that these criteria are not relevant in determining whether or not the Minister should waive the late filing of documents. The key issue was not whether the Minister should have allowed the late filing of the SR&ED submission. Rather, it appeared that the Minister did not even consider whether the forms should be allowed to be filed, because the taxpayer did not meet the three tests that had been developed internally by the CRA.
The Court noted that "the Minister's delegate appears to have imposed these criteria on himself, and elevated them to the status of decisive factors." The Court quoted Justice Joyal in the Kutlu decision that "There is no authority for this in the ITA, and the cases are opposed to exercising a discretionary authority in that way." In this case, the Court said that it was open to the Minister's delegate to consider the argument put forward by the taxpayer and to accept it or reject it, as he deemed appropriate. "It was not, however, open to the Minister's delegate to refuse the request simply because it did not meet criteria that have no foundation in the enabling legislation."
The Court allowed the taxpayer's application for judicial review of the Minister's decision. This meant that a different Minister's delegate has to review the information again before making a decision.
The important lesson in this case is that the CRA's internal policies are not law. Obviously, individuals employed by the CRA will adhere to their own administrative policy. However, this does not mean that a court has to follow those policies. The Court will not accept the concept of the CRA's administrative policies being applied to a Fairness Request when such policies have no basis in law.
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