Federal Court of Appeal confirms late applications can be accepted. (By Wayne Tunny of KPMG)

This is an important case to consider when you have to deal with needing to file a Notice of Objection that is past the 90 day time limit.

Well worth reading.

Dan White

Fairness Request Rehearing

The FCA recently found in the taxpayer’s favour in Lanno (2005 FCA 153), allowing his application for judicial review of the CRA’s refusal to grant relief under the fairness provisions for a late-filed notice of objection. The FCA overturned the FCTD’s decision, found that the CRA’s denial of the relief was not reasonable, and ordered that the fairness application be referred to a different CRA decision maker for reconsideration.

The fairness provisions in subsection 152(4.2) allow an individual to ask the CRA to accept a late-filed return for a taxation year or reassess a return (for tax, interest, or penalties) beyond the normal reassessment period to provide for an income tax refund or reduce an amount payable. Information Circular 75-7R3, paragraph 4, states that a reassessment to create a refund ordinarily is made on receipt of a written request by the taxpayer, even if a notice of objection has not been filed within the prescribed time, so long as certain conditions are met, such as a finding that the application is not based solely on another taxpayer’s successful appeal to the courts.

The taxpayer was one of many investors in a real estate project in respect of which he claimed losses in his 1993-95 tax returns. In 1997, the CRA disallowed those losses, saying that he had no reasonable expectation of profit (REOP). The taxpayer had intended to file notices of objection, but he thought that the accounting firm that represented the investors in the real estate project had filed the notices on his behalf; in February 2002, he learned that the objections had not been filed. In December 2002, the accounting firm applied on his behalf for fairness relief, but the application was denied in May 2003 on the ground that it was based solely on a successful appeal to the courts by another taxpayer: in May 2002, the SCC in Stewart ([2002] 2 SCR 645) had held that the REOP test should not determine whether a taxpayer’s activities were a source of income for the purposes of section 9. The accounting firm requested a review of the CRA’s May 2003 decision. This second-level fairness request was denied in July 2003 on the basis that no circumstances beyond the accounting firm’s control had prevented it from filing an objection on the taxpayer’s behalf: the CRA cannot assume responsibility for errors or omissions made by a taxpayer’s representative.

The taxpayer requested reconsideration of this second-level fairness response, but was informed in November 2003 that the decision remained unchanged. The CRA refused to change its decision because (1) the fairness provisions are discretionary and cannot be used to extend the time limit to file an objection; (2) there were no circumstances beyond the taxpayer’s control that prevented the timely filing of an objection; and (3) there was no evidence of error or delay by the CRA. The taxpayer’s application for judicial review of the CRA’s July 2003 decision was dismissed; the lower court concluded that the refusal was not “patently unreasonable.” However, the FCA concluded that the standard of review for a fairness application should be the less deferential standard of “reasonableness,” based on its decision in Hillier ([2001] 3 CTC 157). The FCA made three observations on the reasons given by the CRA for denying the fairness application. (1) It was incorrect to say that the fairness provisions cannot be used to extend the time limits for filing a notice of objection. Paragraph 4 of IC 75-7R3 says, “A reassessment to create a refund ordinarily will be made upon receipt of a written request by the taxpayer, even if a notice of objection has not been filed within the prescribed time” (emphasis added by the court). (2) The CRA misapprehended the facts when it stated that a refund could not be granted “based solely upon a successful appeal to the Courts by a taxpayer” (in this case, Stewart). The evidence showed that the taxpayer’s fairness application was based on a number of misunderstandings between him and the accounting firm that led to the late filing of the objections. (3) The CRA failed to address whether there was any reason to treat the taxpayer differently from three other individuals in the same position who had obtained relief; the CRA thus failed to take into account a relevant consideration. On the basis of those observations, the FCA said that the CRA’s denial of the application was not reasonable.

Wayne Tunney
KPMG LLP, Montreal

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