In Grewal v Canada (National Revenue), 2020 FC 356, the taxpayer, as part of a voluntary disclosure (VD), reported the existence of certain loans but (only implicitly?) took the position that they were not relevant to his income under the Income Tax Act (Canada) (the “Act”): he filed T1 adjustment requests that included certain amounts in his income but no amounts in respect of the loans.
The Minister processed the VD as filed and issued reassessments for the relevant years. The Minister then conducted an audit and took the position that the loans represented benefits under subsection 246(1) of the Act. The Minister, in new reassessments for the years subject to the VD, imposed gross negligence penalties of about $3.3 million. Interestingly, the Minister did not impose penalties in respect of income that had been reported in the VD as filed.
The taxpayer filed an application in the Federal Court for a judicial review of the Minister’s decision to “ignore” the previously-accepted VD. The Court, citing Vavilov, dismissed the application. The Minister did not “change his mind” by performing the audit: the Minister, in accepting the VD, specifically stated that it was subject to verification.
What of the fact that the taxpayer disclosed the loans in his VD without reporting them as income?
[37] However, I am not persuaded by the Applicant’s arguments. If taxpayers could re-characterize taxable income or benefits as non-taxable benefits in their applications to the VDP and thereby escape penalties from future audits for having ““disclosed”” the amounts in this application, it would be contrary to the purpose of the VDP and its public policy rationale, which is meant to promote compliance with Canada’s tax laws by encouraging taxpayers to voluntarily come forward and correct previous omissions in their dealings with the CRA. Contrary to the Applicant’s submissions, the potential assessment of penalties even after an acceptance to the VDP will encourage taxpayers to be more diligent in their VDP applications, and to ensure that they exercise a high degree of care when submitting their VDP applications to ensure completeness and accuracy.
[38] I agree with the Respondent’s position that to interpret the Information Circular as promising protection from penalties even on the non-taxable amounts disclosed by the taxpayer would put taxpayers applying to the VDP in a better position than the ordinary taxpayers. Moreover, the Applicant is an experienced professional accountant, with experience at KPMG, one of the four major accounting firms in Canada. He is an experienced businessman, had interests in several businesses, and was the CFO of Solaris. Although the Applicant argues that section 246(1) is an ““obscure provision”” in Part 16 of the Act and that not all accountants are well-versed with the entirety of the Act, the audit papers further note that the Applicant and Solaris consulted several tax professionals throughout the audit period about offshore businesses and non-resident companies. Given his background, the Applicant was knowledgeable about tax matters, and it raises suspicions as to whether the Applicant may have been attempting to avoid penalties on his loans by characterizing them as non-taxable, but including them in his VDP application.
It would be interesting to know more about how the taxpayer disclosed the loans in his VD materials. Perhaps the taxpayer merely noted the loans and hoped the CRA would not choose to inquire further. Perhaps, however, the taxpayer made note of the loans and described the uncertainty about how they should be treated for the purposes of the Act. If the taxpayer did the former, which seems likely, then one can understand the Court’s skepticism and deference to the Minister’s approach. If the taxpayer made note of the uncertainty in a manner that highlighted the issue to the CRA, then the Court’s dismissal of the subsection 246(1) difficulties appears cavalier.
The Court was also unimpressed by the Applicant’s arguments grounded in promissory estoppel.
[40] To establish promissory estoppel, one must show: (1) a promise that the promisor will conduct itself in a certain way in given circumstances; (2) reliance on that promise by the promisee; and (3) action on the promise to the promisee’s detriment and/or the promisor’s benefit
The Court found that none of these conditions were met to prevent the Minister imposing gross negligence penalties.
2022 08 17 note: The Federal Court of Appeal dismissed the taxpayer’s appeal at 2022 FCA 114.
