2005 FC 639
T-1692-04
T-1693-04
Aashish M. Karia (Applicant)
v.
Minister of National Revenue (Respondent)
and
M. Karia Ltd. (Applicant)
v.
Minister of National Revenue (Respondent)
Indexed as: Karia v. M.N.R. (F.C.)
Federal Court, Strayer D.J.--Toronto, April 14 and May 6, 2005.
Income Tax -- Penalties -- Judicial review of Canada Customs and Revenue Agency (CCRA) decision applicants not qualifying for Voluntary Disclosures Program (VDP) -- VDP encouraging clients having deliberately omitted reporting, paying taxes to make voluntary disclosure -- If CCRA finding disclosure satisfactory, Minister of National Revenue authorized, pursuant to Income Tax Act, s. 220(3.1), Excise Tax Act, s. 281.1, to waive, cancel penalties, interest -- Applicants' residence, business searched by police in connection with fraud investigation, police mentioning might notify CCRA of failure to report income tax -- Applicants' counsel advising CCRA of unnamed clients run-in with police, wish to make VDP disclosure -- CCRA replying based on circumstances described, disclosure valid as presented, subject to new details coming to light -- Also requesting names of clients for validity of voluntary disclosure to be confirmed -- Subsequently advising applicants' counsel clients not qualifying for VDP because disclosure initiated based on knowledge of current enforcement activities, thus not voluntary as required by Income Tax Information Circular IC00-1R -- Requirements of promissory estoppel met in case at bar -- Information Circular, s. 6(a) creating promise, i.e. disclosure considered voluntary unless client having knowledge of audit, investigation -- When read together, Information Circular, CCRA's reply to applicants's counsel invitation for applicants to make disclosure -- Applicants entitled to assume further disclosures to be considered voluntary -- By revealing identity, applicants acting to their detriment, respondent estopped from deciding matter on basis other than Information Circular, s. 6(a) -- Respondent never addressing whether applicants making disclosure with knowledge of audit, investigation by authority with which CCRA having information exchange agreement -- Fact CCRA believed information exchange agreement existing between it, police not determinative of matter -- Applicants not expected to know, find out about agreement as Information Circular, s. 6(a) not including constructive knowledge -- Obiter: Agreement in fact "informal relationship" not meeting requirement of "information exchange agreement" in Information Circular, nor basic requirement of transparency -- Applications allowed.
These were applications for judicial review of an August 19, 2004 decision of the Canada Customs and Revenue Agency (CCRA) confirming a February 18, 2004 decision that the applicants did not qualify for the Voluntary Disclosures Program (VDP).
Pursuant to subsection 220(3.1) of the Income Tax Act and section 281.1 of the Excise Tax Act, the Minister of National Revenue is authorized to waive or cancel all or any portions of a penalty or of interest otherwise payable under those Acts. This discretionary power is exercised in part by a Voluntary Disclosures Program, described at the time in question by Income Tax Information Circular IC00-1R (Information Circular). That Information Circular encourages clients who have deliberately omitted to report and pay taxes to come forward and correct deficiencies to comply with their legal obligations. If full disclosure is made to the satisfaction of the CCRA, then the discretion of the Minister referred to above may be exercised.
The applicants' residence and business were searched by the Peel Regional Police on September 17, 2003 in connection with a fraud investigation, the same day that the Investigations Division of CCRA had requested the tax returns of the applicants for study. On October 17, 2003, the applicants' counsel wrote to CCRA on a "no-name basis" to advise that his clients wished to make a disclosure under the VDP. Counsel also advised that his individual unnamed client had been charged with a minor fraud by an unnamed police force, and that this police force might notify CCRA that the client had unreported income. Counsel concluded by stating that based on an earlier telephone conversation with CCRA, it was his understanding that CCRA would view the disclosure to be made by his clients as voluntary, for the purposes of the VDP. CCRA replied on October 21, 2003 that based on the circumstances described, the disclosure would be valid as presented, subject to any new details coming to light, and that the validity of the voluntary disclosure could not be confirmed until after the names of the clients were given and all facts verified. This information was provided to CCRA on January 19, 2004. On February 18, 2004, CCRA advised the applicants' counsel that his clients did not qualify for the VDP because the disclosure was involuntary as it was initiated based on the knowledge of current enforcement activities. An administrative review confirmed this decision on August 19, 2004.
Held, the applications should be allowed.
The requirements of promissory estoppel are that there be a promise that the promisor will conduct himself in a certain way in certain circumstances, and that the promisee rely on that promise to his detriment. In such circumstances the promisor will not be allowed to exercise his discretion in a manner inconsistent with the promise, if he otherwise has lawful authority to fulfill that promise.
Here, the promise was created by subparagraph 6(a) of the Information Circular, which says that a disclosure initiated by a client will be considered voluntary unless it is "made with the knowledge of an audit, investigation, or other enforcement action that has been initiated by the CCRA, or other authorities or administrations with which the CCRA has information exchange agreements." CCRA's October 21, 2003 letter, read together with the Information Circular, was an invitation to the applicants to proceed with disclosure on the basis of the facts as disclosed so far, and the applicants were entitled to assume that unless there were undisclosed facts which were pertinent to the question of whether they had knowledge of an investigation already under way they could assume that further disclosures would be regarded as voluntary. By revealing their identity, the applicants acted to their detriment. The respondent was thus estopped from deciding this matter on a basis other than as specified in subparagraph 6(a) of the Information Circular.
The respondent never addressed the question of whether the applicants had made their disclosure with the knowledge of an audit or investigation by an authority or administration with which the CCRA had an information exchange agreement. An internal document showed CCRA accepted that the applicants were not aware of the CCRA investigation. Internal records indicated that CCRA only focussed on whether the Peel Regional Police had an exchange of information agreement with CCRA, and the existence of such an agreement was considered to be determinative of the matter. This was wrong. The applicants could not be expected to have known of such an agreement or to have found out about it. Subparagraph 6(a) does not include constructive knowledge.
By way of obiter, it was noted that CCRA did not have proper information before it as to the existence of an "information exchange agreement." By the respondent's counsel's own admission, there was no "written agreement" but only an "informal relationship." An "informal relationship" does not meet the requirement of "an information exchange agreement" in the Information Circular, and does not meet basic requirements of transparency to allow a taxpayer to know in advance whether some agency investigating his affairs has an agreement with CCRA. Furthermore, when the applicants' counsel contacted CCRA on a "no-name" basis, CCRA should have made mention of the possible difficulty if the unnamed police force turned out to have an agreement with CCRA. By failing to do so, CCRA left the applicants with a false sense of security.
statutes and regulations judicially
considered
Excise Tax Act, R.S.C., 1985, c. E-15, s. 281.1(as enacted by S.C. 1993, c. 27, s. 127).
| Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, s. 220(3.1) (as enacted by S.C. 1994, c. 7, Sch. II, s. 181; Sch. VIII, s. 127). |
cases judicially considered
referred to:
Aurchem Exploration Ltd. v. Canada (1992), 91 D.L.R. (4th) 710; 7 Admin. L.R. (2d) 168; 54 F.T.R. 134 (F.C.T.D.); W. & R. Plumbing and Heating Ltd. v. R., [1986] 2 F.C. 195; (1986), 17 C.L.R. 291; 1 F.T.R. 229 (T.D.).
authors cited
Canada Customs and Revenue Agency. Income Tax Information Circular IC00-1R "Voluntary Disclosures Program" (September 2002).
APPLICATIONS for judicial review of a Canada Customs and Revenue Agency decision that the applicants did not qualify for the Voluntary Disclosures Program described by Income Tax Information Circular IC00-1R. Applications allowed.
appearances:
Cliff L. Rand and Susan J. Thomson for applicants.
James W. Leising and Aleksandrs Zemdegs for respondent.
solicitors of record:
Stikeman Elliott LLP, Toronto, for applicants.
Deputy Attorney General of Canada for respondent.
The following are the reasons for order rendered in English by
Strayer D.J.:
INTRODUCTION
[1]These two applications brought by an individual and his wholly owned corporation involve the same facts and were argued together. They seek judicial review to set aside a decision contained in a letter of August 19, 2004 from the Canada Customs and Revenue Agency (CCRA) on behalf of the respondent Minister in which the CCRA confirmed that the applicants did not qualify for the Voluntary Disclosures Program (VDP). That letter was simply confirming the decision already conveyed to the applicants in a letter of February 18, 2004.
[2]Subsection 220(3.1) [as enacted by S.C. 1994, c. 7, Sch. II, s. 181; Sch. VIII, s. 127] of the Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, authorizes the Minister to waive or cancel all or any portions of a penalty or of interest otherwise payable under that Act. Section 281.1 [as enacted by S.C. 1993, c. 27, s. 127] of the Excise Tax Act, R.S.C., 1985, c. E-15 makes similar provision for the waiving of penalties and interest with respect to the Goods and Services Tax. This discretionary power is exercised in part by a Voluntary Disclosures Program which was described, at the time in question, by Income Tax Information Circular IC00-1R dated September 2002 (Information Circular). It states the purpose of the program to be to promote voluntary compliance with reporting and payment of taxes and "encourages clients to come forward and correct deficiencies to comply with their legal obligations". The information circular in question deals with clients who have deliberately omitted to report and pay. (There are other programs for those who have inadvertently omitted reporting or who have been unable to comply due to circumstances beyond their control). The incentive for making voluntary disclosures of past omissions under this program is that if full disclosure is made to the satisfaction of the CCRA then the discretion of the Minister may be exercised so as to waive all or part of the penalties that otherwise could be imposed.
[3]The conditions for a valid disclosure are set out in paragraph 6 of the Information Circular. Subparagraph (a) states as follows:
6. . . .
(a) . . . The disclosure must be voluntary. The client has to initiate the voluntary disclosure. A disclosure may not qualify as a voluntary disclosure under the above policy if it is found to have been made with the knowledge of an audit, investigation, or other enforcement action that has been initiated by the CCRA, or other authorities or administrations with which the CCRA has information exchange agreements.
Subparagraph (b) requires that the disclosure be complete. Subparagraph (c) requires that the disclosure must involve at least one penalty in order to qualify for this program and subparagraph (d) requires that the information disclosed must be either at least one year past due or not initiated simply to avoid late filing or instalment penalties. It is subparagraph (a) which is the most pertinent to this case. It is common ground that the Information Circular is made available to the public and that the applicants and their legal representative proceeded in their disclosures on the basis of the information provided in this circular.
FACTS
[4]On September 17, 2003, the Peel Regional Police executed search warrants on the residence and business of the applicants in connection with a fraud investigation. On the same day the Investigations Division of CCRA had requested the tax returns of these applicants for study. On September 18, 2003, the Peel Regional Police referred certain information from their search to the Investigations Division of CCRA. On October 14, 2003, the applicants' counsel had a telephone conversation with an officer of CCRA concerning the VDP and pursuant to that conversation he wrote to CCRA on October 17, 2003, on a "no-name basis." He advised that according to his information his clients had received credit card payments and deposited them in bank accounts without reporting them as income. He noted that it was possible that some of these amounts had been received on account of Goods and Services Tax that had not been remitted. He also reported his understanding that the individual client had earned some interest income in respect of funds deposited offshore which had not been reported. He advised that his unnamed individual client had been charged by an unnamed police force "with a minor fraud" and that an investigating officer had mentioned to his client that the police might notify CCRA that he had failed to report income. The police officer had not made it clear whether such notification would actually occur or when, and to the best of the knowledge of the client and his counsel it had not yet occurred. He stated that because the police were holding his client's records they were not in a position to ascertain the quantum of unreported income. He concluded his letter with this paragraph:
Based on our telephone discussion, I understand that under the circumstances described above the CCRA will view the disclosure to be made by our clients as voluntary, for the purposes of the Voluntary Disclosure Program. Please confirm that understanding by signing below and returning to my attention a copy of this letter.
CCRA did not confirm this "understanding" by signing the letter. However on October 21, 2003, CCRA sent a letter to the applicants' counsel which included this paragraph:
Based on the circumstances described we consider that the disclosure would be valid as presented. However our determination has been made based on the facts as presented and could change if any new details come to light during the handling of the actual full disclosure. Therefore, a full determination of whether we can accept the voluntary disclosure as valid cannot be confirmed until after the names of your clients are given and all facts are verified. In this regard at the time of the full disclosure the information provided should meet the following four conditions to be valid. . . .
There then followed the quotation of the four conditions set out in the Information Circular, in subparagraphs 6(a), (b), (c) and (d) as referred to above. As a result the applicants' counsel sent a letter to CCRA on January 19, 2004, disclosing the names of the individual client and his company, together with the individual's address and social insurance number and other identifying information in respect of the company. This was the only new information disclosed but the letter noted that "we are preparing the necessary details of their volunta-ry disclosure and will send them to you in due course." CCRA replied by writing a letter to the individual taxpayer on February 18, 2004, to advise him "of our decision concerning your request for the waiver of penalties under the Voluntary Disclosure Program. . . ." It went on to say:
The circumstances of your case have been carefully considered and I regret to inform you that your request cannot be granted. Four conditions must be satisfied to qualify for the benefits of the VDP. Unfortunately, the disclosure was not considered to be voluntary since it was initiated based on the knowledge of current enforcement activities.
[5]The individual taxpayer through his counsel sought an administrative review of this decision. He was advised by CCRA in a letter of August 19, 2004, that a review had taken place and the decision would not be changed. In seeking judicial review of the August 19, 2004 decision, the applicants are really seeking a review of the decision conveyed to them on February 18, 2004, which was simply confirmed in the later letter.
[6]It will be noted that in the letter of February 18, 2004, the reason for finding the applicants disqualified for the VDP was that "the disclosure was not considered to be voluntary since it was initiated based on the knowledge of current enforcement activities." The CCRA takes the position that this is based on subparagraph 6(a) of the Information Circular which says that a disclosure is not voluntary if it is made by a taxpayer with the knowledge of an audit, investigation, etc. already initiated by the CCRA or other authorities "with which the CCRA has information exchange agreements." In his initial contact with CCRA counsel for the applicants raised the question as to whether, due to the fact that the police officer had said they might report information to the CCRA, CCRA would still consider a disclosure to be voluntary. According to the notes made by the CCRA officer who spoke with counsel, he
. . . explained that we may as it sound [sic] like the client was not aware of any compliance action by CCRA but would need to have the details in writing before we could formally make that type of decision.
There is nothing in the record to indicate that the applicants had knowledged that the Peel Regional Police constituted an authority "with which the CCRA has information exchange agreements" as required in subparagraph 6(a) of the Information Circular. Further there is no documentary evidence of any such agreement existing. Internal discussions within CCRA, as described in their records, indicate that some officers believed there to be such an agreement. However when counsel for the applicants, in preparation for the hearing of this matter, quite properly requested a copy of such agreement from the Department of Justice representing the respondent, he received a letter of November 29, 2004, which stated in part as follows:
I have been advised that there is no written agreement. It is merely an informal relationship that exists between the CCRA office in Toronto West, the Investigation Division and Fraud Bureau of the Peel Regional Police.
This information was not provided on a "without prejudice" basis and I regard it as an admission properly made by counsel.
ANALYSIS
[7]It is common ground that the Information Circular and the guidelines concerning the VDP are not delegated legislation and have no force of law as such.
[8]The applicants contend, however, that the terms of the Information Circular, particularly paragraph 6 thereof, create procedural entitlements and constraints which prevent the Minister's discretion being exercised as it was in the letters of February 18 and August 19, 2004. They argue that either the respondent acted without jurisdiction because it had already determined by the letter of October 21, 2003, that the applicants' disclosure would be considered voluntary; or that the applicants had a legitimate expectation that the respondent's later disclosure would not be considered involuntary because of the commitment made in the letter of October 21, 2003; or that the respondent is estopped from denying that the disclosure is voluntary having led the applicants to believe by the letter of October 21, 2003, that it would be treated as voluntary; or that the respondent's decision of February 18, 2004, was confirmed by the letter of August 19, 2004 was patently unreasonable.
[9]I believe the matter can be determined on the basis of the last two submissions combined. First, I believe that the requirements of promissory estoppel exist here. Those requirements are that there must be a promise that the promisor will conduct himself in a certain way in certain circumstances. There must be reliance on that promise by the promisee, and to the detriment of the promisee. In such circumstances the promisor will not be allowed to exercise his discretion in a manner inconsistent with the promise, if he otherwise has lawful authority to fulfill that promise. See e.g. Aurchem Exploration Ltd. v. Canada (1992), 91 D.L.R. (4th) 710 (F.C.T.D.); W. & R. Plumbing and Heating Ltd. v. R., [1986] 2 F.C. 195 (T.D.). Here the promise exists in the form of the Information Circular which says in effect, in subparagraph 6(a) that a disclosure will be treated as voluntary if the client initiates it, subject to it being considered involuntary if the client initiates the disclosure with the knowledge of an audit, investigation, etc. by the CCRA or "authorities or administrations with which the CCRA has information exchange agreements." After counsel for the applicants had specifically advised CCRA that they had been the target of a police search by an unidentified police force and that a police officer had said his force might report information to the CCRA, CCRA wrote the letter of October 21, 2003 to counsel, saying that "based on the circumstances described we consider that the disclosure would be valid as presented." There was of course the usual warning that this would have to be confirmed after full disclosure was made "and all facts are verified." Read together with the Information Circular, this was an invitation to proceed with disclosure on the basis of the facts as disclosed so far, and the applicants were entitled to assume that unless there were undisclosed facts which were pertinent to the question of whether they had knowledge of an investigation already under way they could assume that further disclosures would be regarded as voluntary. They acted to their detriment. In the letter from their counsel of January 19, 2004, they revealed their identity. While the bare fact of giving their identity may not of itself have been to their detriment, when combined with the information which their counsel had already provided on a "no-name" basis in the letter of October 17, 2003, they had disclosed to CCRA that they had received undisclosed monies which they owed for income tax and GST. Further the individual client by the combination of these letters had disclosed that he had earned interest on income from funds deposited offshore.
[10]I am therefore of the view that the respondent was estopped from deciding this matter on a basis other than as specified in subparagraph 6(a) of the Information Circular. The applicants were entitled to rely on that as the manner in which their disclosure would be dealt with. In determining whether the respondent complied with the language of the Information Circular, I believe the appropriate standard of review is that of reasonableness simpliciter. It involves in part the interpretation of the language of the Information Circular which in my view is the governing instrument, and its application to these facts. I believe the Court has as much expertise as the officers of CCRA in interpreting this language. The matter is therefore analogous to a mixed question of law and fact and I believe the appropriate standard is reasonableness. I might add however that if I am wrong in this, and greater deference is owed, I would still consider that the decision of the respondent was patently unreasonable.
[11]It is clear to me that the respondent never addressed the question of whether the applicants had made their disclosure with the knowledge of an audit or investigation by an authority or administration with which the CCRA had an information exchange agreement as required in subparagraph 6(a) of the Information Circular. It is clear from an internal document of CCRA that they accepted that the applicants were not aware of the CCRA investigation which had been initiated in September 2003 (see applicants record, Volume 1, page 69). Internal records of CCRA which show what information the CCRA had before it in making its decision that disclosure was involuntary, indicate that officers only focussed on whether the Peel Regional Police had an exchange of information agreement with CCRA but not whether the applicants had knowledge of it. CCRA did not know the identity of the police force in question until after the applicants made their disclosures by counsel of January 19, 2004, providing their names. As a result CCRA was able to trace through their names the fact that a CCRA investigation of the applicants was already under way and that the Peel Regional Police Force was the force involved with these parties, having already provided information to CCRA in September 2003 (see applicants' record, Volume 1, page 70). Once CCRA officers learned, or believed that they had learned, that there was an "agreement with" the Peel Regional Police, that was apparently considered determinative of the matter. But there is nothing to indicate, and clearly CCRA did not concern itself about the matter, that these applicants would have had knowledge that the Peel Regional Police Force had an agreement with the CCRA. Counsel for the respondent seemed to argue that it was sufficient if the applicants ought to have known of such an agreement or ought to have found out if there was such an agreement: in other words knowledge in subparagraph 6(a) includes constructive knowledge. I am unable to interpret the language of the Information Circular in that way. If CCRA wishes to administer a program on that basis it should modify the Information Circular accordingly. If it does so, however, it should also provide some anonymous means for taxpayers learning with which agencies or authorities it has such agreements, perhaps through a Web site or publication in the Canada Gazette.
[12]Although this disposes of the matter I would also add that I have great difficulty in accepting that the CCRA had proper information before it as to the existence of an "information exchange agreement" between the CCRA and the Peel Regional Police Force. While the internal report made by the relevant appeals officer states that such an agreement existed, when their counsel was asked for a copy of it he advised that there was no "written agreement" but only an "informal relationship." An "informal relationship" does not meet the requirement of "an information exchange agreement" in the Information Circular, nor I suggest does it meet basic requirements of transparency to allow a taxpayer to know in advance whether some agency investigating his affairs has an agreement with CCRA. Among other things, we have no idea when this "arrangement" came into effect nor whether the information here was within the scope of that agreement. It is surprising that when CCRA was informed on October 17, 2003 by the "no-name" disclosure of the fact of a search by an unnamed police force and of the conversation between a police officer and the taxpayer suggesting that the police might report information to CCRA, the CCRA in its letter of October 21, 2003 to counsel made no mention of the possible difficulty if the unnamed police force turned out to have an agreement with CCRA. Instead they advised that "based on the circumstances described we consider that the disclosure would be valid as presented," subject of course to "any new details" which might come to light and which could change this determination. By not warning the applicants of this problem whose parameters were knowable by CCRA at that time, and by taking the position later that once such an "agreement" had been found the disclosure would be considered involuntary without need for proof of the taxpayer's knowledge of the existence of that agreement, the CCRA left the applicants with a false sense of security.
[13]I will therefore set aside the decision of August 19, 2004 (confirming the decision of February 18, 2004) on the basis that it is unreasonable, and I will refer the matter back to the respondent with the direction that the disclosures of the applicants be treated as voluntary and assessed in the Voluntary Disclosures Program on that basis.