Category Archives: Federal Court

Canada (National Revenue) v Patry, 2012 FC 977

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Review of Jeopardy Order – Factors to Consider

Canada (National Revenue) v Patry, 2012 FC 977

At issue was the question of whether an ex parte jeopardy order granted by the FC should be set aside.

The Court set aside the jeopardy order on the basis that the Respondent had managed to seriously challenge a good portion of the evidence relied on by the MNR to support the Order, and the MNR has not satisfied the Court that if the order is lifted, the equity would be dissipated to such an extent that amounts owed would be lost.

FACTS

The CRA reassessed the respondents for the 2006 and 2007 tax years and imposed civil penalties in relation to returns prepared by Mr. Party for his clients from the 2004-2007 tax years.  A notice of objection has been filed and litigation is being pursued in the TCC.

The Parties are also charged with certain offences under the ITA and the Excise Tax Act.

The CRA obtained a Jeopardy order by satisfying the court that there were reasonable grounds to believe that the collection of the amounts assessed for tax would be jeopardized by delay in collection. The amount is $900,000, of this $160,000 is tax owing, and the rest are penalties and interest.  The CRA was able to obtain certificates and to have them registered against titles of the respondents’ principal residences.

LEGAL FRAMEWORK

Subsection 225.2(2) permits the MNR to bring an ex parte motion for a Jeopardy Order to a judge of the FCTD.  The order can be granted if the Judge is satisfied that there are reasonable grounds to believe that the collection of all or any part of the amount assessed in respect of the taxpayer would be jeopardized by a delay in the collection of that amount.  The order gives the MNR authorization to take forthwith any of the actions described in paragraphs 225.1(1)(a) to 225.1(1)(g).

The taxpayers may apply for a review of the order granted pursuant to subsection 225.2(8).  A review judge must determine the question summarily to either confirm, set aside, vary, or make such other order as appropriate. Relevant factors for review of a Jeopardy order are set out in Canada (Minister of National Revenue – MNR) v Services ML Marengère Inc (1999), 176 FTR 1 at para 63.

The test involved has two parts (see Canada (Minister of National Revenue – MNR) v Reddy, 2008 FC 208, Canada (Minister of National Revenue – MNR) v Accredited Home Lenders Canada Inc, 2012 FC 461, at paras 8-9):

  • (1) Respondents bear the burden of establishing that there are reasonable grounds to doubt that the collection of all or any part of the amount assessed against them would be jeopardized by a delay in the collection of that amount;
  • If so established, then (2) the burdens shifts to the Minister to justify the Jeopardy Order by demonstrating that, on a balance of probabilities, it is more likely than not that the collection would be jeopardized by delay.

ANALYSIS

The Respondents argued that the original order was made in the absence of reasonable and probable grounds, and without the benefit of complete information.  They argue that the evidence fails to establish that their affairs were conducted in a manner so as to ” waste, transfer, dissipate or liquidate assets and place them beyond the reach of the Minister (Canada v Goldbeck (1990), 90 DTC 6575).  The MNR argued that there was no evidence of material change in the facts underlying the original order, and that the evidence taken as a whole reinforces the need for a jeopardy order.

(1) Reasonable Grounds to Doubt Collection in Jeopardy

This part of the test requires the respondents “to muster evidence, whether by affidavits, by cross-examination of the Affiants on behalf of the Crown, or both, that there are reasonable grounds to doubt that the test required by paragraph 225.2(2) has been met” (para 12).

The Court held that this part of the test was met on the basis of various factual inconsistencies apparent in the grounds offered to support the original order.

The MNR had primarily supported the original order on the basis that the Patry home was up for sale, and if sold the proceeds would be placed beyond the reach of the Minister or used to pay other creditors. The Court, however, noted:

  • The house was never sold, was removed from listing, and has not been relisted for sale.
  • The original order was made on the basis that the home was not an appreciating asset and the wrong appraisal value was used – the correct appraisal value was 600-900,000 higher, and the evidence was that the property was an appreciating asset showing that the equity available to satisfy the debt to the minister is higher than initially implied
  • Where a taxpayer sells real estate that is the only asset to satisfy a cash debt, and the cash received is still available to satisfy the debt, the sale does not constitute grounds for a jeopardy order – Canada (Minister of National Revenue – MNR) v Landru, [1993] 1 CTC 93, [1992] SJ no 519; Deputy Minister of National Revenue, Taxation v Quesnel, 2001 DTC 5602
  • Mere suspicion or concern that the funds would be used to pay other creditors or put out of reach of the minister is not sufficient to establish reasonable grounds (Danielson v Minister of National Revenue (1986), 86 DTC 6495; Her Majesty the Queen v Satellite Earth Station Technology Inc (1989), 89 DTC 5506).
  • There is no clear indication that the Respondents have engaged in unorthodox behaviour “which raises a reasonable apprehension that it would be difficult to trace funds or recover them for the tax debt” (Laframboise v Her Majesty the Queen (1986), 86 DTC 6396; Canada (Minister of National Revenue) v Rouleau (1995), 95 DTC 5597
  • Unorthodox behaviour includes:

In this case, the ” suspicious deposits to an unidentified third party initially flagged by the Minister have since been explained by the Respondents as being traceable to transfers between Mr. Patry’s business and personal bank accounts”.

(2) Minister’s Justification Insufficient to Satisfy Subsection 225.2(2)?

The Minister argued that there remained ample evidence to support the need for the order, including:

  • It was unclear how the Respondent would maintain their standard of living;
  • The house would simply be listed for sale again;
  • If sold, the proceeds would us used as living expenses and legal counsel

The court recognised that the home may be sold in the future, but the evidence does not satisfy the court that the proceeds would be used in a way to dissipate the assets to the extent making the satisfaction of the MNR’s debt unrecoverable.

The Court considered it necessary to look behind the assessment to consider the type of behaviour the taxpayer was engaged in (to determine unorthodox behaviour) and to recognize the nature of the debt owing (apportionment of tax owing vs administrative penalties).  The Court stated:

[27] … While Justice Martineau acknowledged that assessments should be assumed valid in Robarts, above at para 68, he also confirmed that if the record shows that the good portion of the evidence used by the Minister to justify the jeopardy order is seriously challenged by the taxpayer, the Court cannot simply ignore these submissions when determining whether the jeopardy order should stand.  The Minister’s assertion must necessarily be called in to question (see also Canada (Minister of National Revenue – MNR) v Douville, 2009 FC 986, [2009] FCJ no 1218 at paras 16, 20).

[28] Given that the vast majority of the amounts assessed as owing in this case consist of administrative penalties and interest, in my view, it would be unfair to allow the Jeopardy Order to have the effect of preventing the Respondents from utilizing any equity in their house whatsoever for living expenses or counsel. While one can speculate that the Respondents may use funds for this purpose if the house is sold, there is absolutely no evidence before that suggests the amounts would be so high as to deplete the $800,000 to $1,000,000 in equity such that the Minister would not be able to realize upon whatever debt may remain at the conclusion of this dispute.

– Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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Fannon v Revenue Canada Agency, 2012 FC 876

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Reasonableness of the Minister’s Denial of Child Care Expense Deductions Pursuant to Subsection 63(3) in the Interest of Fairness AND Constitutionality of the Definition of Child Care Expenses in that Subsection

Fannon v Revenue Canada Agency, 2012 FC 876

There were two issues before the Court here:

  • the reasonableness of the minister’s discretionary decision under the fairness provision.
  • whether the definition of child care expenses in subsection 63(3) violates section 15(1) of the Charter. [I use the term section and not subsection in reference to 15(1) as this is the term the court uses].

The Father of a child (“taxpayer”) wanted to deduct daycare expenses he was ordered to pay for a child who did not reside with him. The taxpayer requested to be allowed to deduct child care expenses pursuant to subsection 63(3) of the ITA in the interest of fairness. The CRA did not allow the deduction on the basis that the child did not live with the taxpayer in the years in question, and that they could not be accepted under the taxpayer relief provisions. The taxpayer applied for judicial review to the Federal Court.

The Court held that that the Minister’s denial of the deduction for a child who did not reside with him was an acceptable [and reasonable] outcome, and that the definition of “child care expenses” in subsection 63(3) did not violate section 15(1) of the Charter.  Something more than merely the denial of  financial benefit is required to make out a section 15(1) violation.

The Court identified the standard of review for discretionary decisions of the Minister under the ITA as reasonableness.

The court reviewed the definition of child care expenses in subsection 63(3), which clearly relates to the supporting person who resided with the child at the time the expense was incurred. Based on this, the court found that the Minister’s denial of the deduction for a child who did not reside with him was an acceptable outcome.

The Court then addressed the question of subsection 63(3) discriminating against non-custodial parents by disallowing the deduction of daycare expenses.  The taxpayer argued that he was denied equal benefit of the law, since as a non-custodial parent he remained liable to pay a portion of the daycare costs, but is denied the benefit of the tax deduction.

After identifying the two-part test for section 15(1) as identified by the Supreme Court of Canada in R v Kapp, 2008 SCC 41, the court expressed doubt as to the taxpayer’s ability to satisfy the test on two grounds:

  • There was no evidence or proper factual foundation to address the question of whether subsection 63(3) creates a disadvantage by perpetuating prejudice of stereotyping; and
  • It was unclear whether non-custodial parents were an analogous group to those enumerated in section 15(1).

The FC saw no reason to depart from Justice Webb’s decision in Fannon v Canada, 2011 TCC 503, where the Charter argument was addressed, and quoted:

[B]ased on the provisions of the Act which the Appellant is challenging and the groups as proposed by the Appellant, the Appellant’s group would be parents who pay for daycare expenses as a result of a Court Order (or an agreement) but with whom a child does not reside and the appropriate comparator group must be parents who pay child care expenses (as a result of an agreement with the daycare facility) and with whom the child does reside. The relevant distinction created by the Act is based on whether the child resides with the person or not. Clearly this is not one of the enumerated grounds in subsection 15(1) of the Charter.

[…]

Whether a child is residing with one person or another is not a characteristic that is immutable or changeable only at an unacceptable cost to personal identity. A child who is residing with one parent could start to reside with the other parent. If a child should commence to reside with the other parent, this would not be at an unacceptable cost to personal identity of either the first parent or the second parent. As a result it seems to me that it is not an analogous ground and the provisions of subsection 15(1) of the Charter are not applicable to the provisions of the definition of child care expenses in subsection 63(3) of the Act.

The Court also noted that the taxpayer was unable to demonstrate that the distinction is discriminatory because the relevant factors of pre-existing disadvantage, correspondence with actual characteristics and the nature of the interest affected were not present.  ” There is no pre-existing disadvantage for those non-custodial parents paying child care expenses [, and T]hey are not “disadvantaged” in the sense of being vulnerable, prejudiced or facing a negative social characterization”.

Finally, the court considered whether there is a correspondence between the distinction made in the provision and the characteristics or circumstances of the individual.  The Court accepted the Crown’s position that the taxpayer’s circumstances did not match the purpose of the provision. The purpose of subsection 63(3) of the ITA is to allow a tax deduction those incurring child care expenses to carry on employment, business, research, or educational pursuits. The taxpayer did not directly incur child care expenses to engage in these activities because the child was not residing with him.  Justice Near also referred to the SCC decision in Granovsky v Canada (Minister of Employment), 2000 SCC 28, where it was said that something more than a deprivation of a financial benefit is required to establish a violation of section 15(1) of the Charter.

– Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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