Apparently, the Department of Finance and the CRA believe that you can have too much fairness in the tax system. In the 2004 budget, Finance introduced a ten-year limitation period for fairness applications. It appears that the CRA is now adopting a particularly strict interpretation of the rule to deny relief to taxpayers even where the events that form the basis for the fairness request occurred within the limitation period.
Subsection 220(3.1) of the Income Tax Act reads as follows:
The Minister may, on or before the day that is ten calendar years after the end of a taxation year of a taxpayer […] or on application by the taxpayer or partnership on or before that day, waive or cancel all or any portion of any penalty or interest otherwise payable under this Act by the taxpayer or partnership in respect of that taxation year or fiscal period […]
Assume that, after filing a notice of objection and receiving a confirmation, X has filed a notice of appeal to the Tax Court in respect of the 1993 taxation year. In early 2005, X’s appeal is disposed of, and X then applies for interest relief under the fairness legislation in respect of delays caused by CRA Appeals and the courts from 1998 to 2002. Is X entitled to relief under the fairness legislation?
David Sherman explains the ambiguity in subsection 220(3.1) in his notes on the subsection in the Practitioner’s Income Tax Act (Thomson/Carswell, 2005):
It is not clear whether “in respect of” refers to the year for which tax is payable (on which interest is accruing) or the year during which the interest accrued. One hopes it will be the latter. If it is the former, then no interest waiver would be available for any interest accrued over many years on a reassessment in 2005 of the 1994 taxation year, which would be a very punitive result.
I recently spoke to a CRA representative who saw no such ambiguity. According to the representative, “the legislation is clear” and X (in my example above) would not be entitled to any relief because the taxation year in respect of which the relief is requested falls outside the ten-year limitation period. The representative even claimed that his interpretation was supported by the CRA Tax Operations Manual (although he refused to provide me with a copy of the relevant portion of the Manual or confirm his claim in writing).
David Sherman subsequently wrote to me to make the following additional comments about the CRA’s position:
Looking at this again, I think it’s correct to say that “in respect of” should be the second interpretation [that the ten-year limitation period does not exclude requests in respect of taxation years that are outside the period where the request relates to subsequent events within that period], because interest doesn’t arise in respect of an assessment of a past year, but in respect of an outstanding balance. This is because of daily compounding under 248(11). It doesn’t matter where a balance arose from (and in some cases it’s impossible to tell — all payments are fungible and simply applied to the outstanding balance that’s owing). Interest today is computed on yesterday’s balance and added to the total, and it doesn’t matter whether yesterday’s balance arose from a 2004 assessment or a 1993 assessment.
Also, the grounds for interest waiver always relate to actions that took place during the recent 10-year period — e.g., delay by CRA, or the client’s health problems. Finance’s reason for drafting the legislation was to prevent claims for relief that the CRA couldn’t properly respond to because the events in question are too far back. Here, it doesn’t matter that the transaction in question giving rise to the initial assessment was too far back — the events giving rise to the waiver are much more recent. So our interpretation is consistent with the problem that the CRA and Finance identified when introducing the 10-year limit.
In addition to the foregoing, one might argue that the rules of statutory interpretation require the more liberal approach advocated by David. In my example above, X as of December 31, 2004, had a right to apply for fairness in respect of the tax liability related to the 1993 taxation year. The amendment to subsection 220(3.1) took away that right retroactively. (The amendment did not provide for grandfathering unless a taxpayer applied for fairness before 2005; but X could not apply before 2005 because his appeal was still before the Tax Court and the CRA will not accept a fairness application in those circumstances.) Parliament can enact legislation with retroactive effect, as noted by Peter Hogg in the following passage that was quoted with approval by the Supreme Court of Canada in British Columbia v. Imperial Tobacco Canada Ltd., 2005 SCC 49:
Apart from s. 11(g) [of the Charter], Canadian constitutional law contains no prohibition of retroactive (or ex post facto laws). There is a presumption of statutory interpretation that a statute should not be given retroactive effect, but, if the retroactive effect is clearly expressed, then there is no room for interpretation and the statute is effective according to its terms. Retroactive statutes are in fact common.
As pointed out by Professor Hogg, however, the courts will interpret retroactive legislation to limit or eliminate the effect of the retroactivity. Where it can be argued plausibly that subsection 220(3.1) is ambiguous or unclear, it would seem likely that the courts will interpret the provision to limit the retroactive effect of the ten-year rule. X, then, should be entitled to apply for fairness in respect of events occurring after 1993 and within the ten-year period ending in 2005.
David Sherman wrote to point out that my last argument — respecting the retroactive effect of the legislation imposing the ten-year limitation period — applies only if one agrees that the CRA’s can refuse to accept a fairness application until after all objections and appeals have been decided. The Hamilton TSO, at least, will return the original of a letter applying for fairness and, apparently, refuse even to put the application in the queue. David points out, however, that the legislation imposes no such condition precedent, and so it would be difficult for a taxpayer to make an argument based on the retroactive effect of the legislation that imposed the ten-year limitation period.