A monthly feature focusing on current issues in Federal Income Tax, written by Angelo Gentile, Fraser Casgrain LLP.

The recent decision of the Federal Court of Appeal in Bozzer v. The Queen, 2011 DTC 5106, represents a victory for all Canadian taxpayers, as it overturns an overly-restrictive interpretation of a provision designed to grant taxpayer relief in appropriate circumstances.

Overview of Reasons for Judgment

The facts of this case are straightforward. On December 6, 2005, Mr. Bozzer applied to the Minister for a waiver of interest under subsection 220(3.1) of the Income Tax Act in respect of interest that had accrued on amounts assessed for his 1989 and 1990 taxation years. The Minister denied Mr. Bozzer’s first-level request for the following reasons:

As of January 1, 2005, the Agency’s policy with regards to fairness requests was amended to exclude debts over 10 years of age from the date of submission. The ten years expired on December 31, 1999 for the 1989 taxation year and December 31, 2000 for the 1990 taxation year. For this reason we are unable to consider your request for departmental delay or error and have concluded it would not be appropriate to cancel or waive the interest.

Mr. Bozzer applied to the Minister for a second-level review, and the Minister denied that application as well, for the following reasons:

The above legislation (subsection 220(3.1)) is applicable because you applied for interest cancellation on December 6, 2005. Therefore the Minister has no discretion under subsection 220(3.1) to waive or cancel any interest otherwise payable under the Act in respect of your 1989 and 1990 taxation years. This is because it has been more than ten calendar years since the ends of your 1989 and 1990 taxation years. In addition, you applied after 2004, which is more than ten calendar years after the ends of your 1989 and 1990 taxation years.

It should be noted that the Minister’s comments were consistent with paragraphs 12 - 16 of Information Circular 07-1 entitled ‘‘Taxpayer Relief Provisions’’, dated May 31, 2007 (‘‘IC 07-1’’).

Mr. Bozzer applied to the Federal Court for judicial review of the Minister’s decision. The Federal Court judge dismissed the application, finding (at paragraph 51 of his reasons for judgment) that ‘‘the time limit in subsection 220(3.1) of the ITA is for the 10 calendar years after the relevant taxation year, namely the year of assessment’’. Mr. Bozzer appealed to the Federal Court of Appeal, which allowed his appeal (per Sharlow, Trudel and Stratas, JJ.A.). The issue on appeal was how the 10-year limitation period in subsection 220(3.1) of the Income Tax Act should be interpreted. The Court noted that this was entirely a question of statutory interpretation reviewable on a standard of correctness.
Subsection 220(3.1) provides

The Minister may, on or before the day that is ten calendar years after the end of a taxation year of a taxpayer (or in the case of a partnership, a fiscal period of the partnership) 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, and notwithstanding subsections 152(4) to (5), any assessment of the interest and penalties payable by the taxpayer or partnership shall be made that is necessary to take into account the cancellation of the penalty or interest.

Mr. Bozzer argued that ‘‘interest . . . payable . . . in respect of [a] taxation year’’ means any interest accrued in that taxation year on a tax debt. Thus, subsection 220(3.1) permits the Minister to exercise his discretion to cancel interest accrued in any taxation year ending within 10 years before the taxpayer’s application for relief, regardless of when the underlying tax debt arose.

The Minister argued that ‘‘interest . . . payable . . . in respect of [a] taxation year’’ means any interest accrued on a tax debt that arose in that taxation year. Thus, the Minister may exercise his discretion to waive interest otherwise payable under the Income Tax Act only if a taxpayer applies within 10 calendar years of the end of the taxation year in which the underlying tax debt arose.

The Federal Court of Appeal applied a textual, contextual and purposive analysis to determine the proper interpretation of subsection 220(3.1). The Court found that the text of the provision could support either interpretation, and as a result considered the context and purpose of the provision. The Court found that the purpose of the provision was aptly summarized in IC 07-1, at paragraph 8

The legislation gives the CRA the ability to administer the income tax system fairly and reasonably by helping taxpayers to resolve issues that arise through no fault of their own, and to allow for a common-sense approach in dealing with taxpayers who, because of personal misfortune or circumstances beyond their control, could not comply with a statutory requirement for income tax purposes.

Using a hypothetical example, the Court then tested the competing interpretations in light of this purpose and found that Mr. Bozzer’s suggested interpretation was more consistent with the purpose of the provision.

The Federal Court of Appeal also considered the context of the provision, including its history, the Technical Notes, and another ‘‘computation of time’’ provision in subsection 220(3.201) of the Income Tax Act, which deals with the time period to make an election under section 60.03. Having regard to all these factors, the Court concluded that Mr. Bozzer’s interpretation was more consistent with the context of the provision.

The Significance of the Bozzer Decision

The original intent of the taxpayer relief provisions was to provide the Canada Revenue Agency (the ‘‘CRA’’) with statutory authority to assist taxpayers who deserve relief from interest or penalties due to circumstances beyond their control, delays by the CRA or for other compelling reasons. The CRA pursued a very restrictive policy of refusing to even consider applications for relief where the underlying tax debt arose more than 10 years before the application was made. The decision of the Federal Court of Appeal sends a strong message that legislation that is designed to assist taxpayers should be interpreted in a way that actually accomplishes that objective. Part of the significance of the
Bozzer case is that the decision applies to all taxpayers, whether they are corporations or individuals, and regardless of the nature of the underlying tax debt.

As a result of the Bozzer decision, the CRA can no longer refuse to consider an application for interest relief where the underlying tax debt arose more than 10 years before the application was made. Of course, the CRA always maintains the discretion to allow or deny an application for interest relief, based on the facts of that particular case, and that discretionary decision is reviewable on a standard of reasonableness.

As of the time of writing this article, the Minister had not filed an application for leave to appeal to the Supreme Court of Canada. The deadline to file a leave application in this case is September 1, 2011.

—Angelo Gentile is an Associate in the Tax Department with the Toronto Office of Fraser Milner Casgrain LLP.

A number of tax lawyers from Fraser Milner Casgrain LLP write commentary for CCH’s Canadian Tax Reporter and sit on its Editorial Board as well as on the Editorial Board for CCH’s Canadian Income Tax Act with Regulations, Annotated. Fraser Milner Casgrain lawyers also write the commentary for CCH’s Federal Tax Practice reporter and the summaries for CCH’s Window on Canadian Tax. Fraser Milner Casgrain lawyers wrote the commentary for Canada–U.S. Tax Treaty: A Practical Interpretation and have authored other books published by CCH: Federal Tax Practice; Charities, Non-Profits and Philanthropy Under the Income Tax Act; Corporation Capital Tax in Canada; and Canadian Transfer Pricing. Tony Schweitzer, a Tax Partner with the Toronto Office of Fraser Milner Casgrain LLP, and a member of the Editorial Board of CCH’s Canadian Tax Reporter, is the editor of the firm’s regular monthly feature articles appearing in Tax Topics.