Signalgene R&D Inc. v. Canada (National Revenue)

Signalgene R&D Inc. v. Canada (National Revenue)
Court (s) Database
Federal Court Decisions
Date
2012-11-27
Neutral citation
2012 FC 1375
File numbers
T-1949-10
Notes
Digest
Decision Content
Federal Court
Cour fédérale
Date: 20121127
Docket: T-1949-10
Citation: 2012 FC 1375
Ottawa, Ontario, November 27, 2012
PRESENT: The Honourable Mr. Justice Lemieux
BETWEEN:
SIGNALGENE R&D INC.
Applicant
and
THE MINISTER OF NATIONAL REVENUE
Respondent
REASONS FOR JUDGMENT AND JUDGMENT
TABLE OF CONTENTS
I. Introduction and Background. 1
II. The relevant statutory regime. 5
III. Facts. 9
IV. The Affidavits. 13
(a) The affidavit of Guylaine Gaudreault 13
(b) The affidavit of Brigitte Gener 16
V. The cross-examinations of the Respondent’s affidavits. 20
(a) Guylaine Gaudreault cross-examination. 20
(b) Brigitte Gener Cross-examination. 23
(c) The affidavit of Evelyn Moskowitz. 25
VI. The position of the Parties. 26
(a) That of Signalgene. 26
(b) That of the Minister 32
VII. Analysis and Conclusions. 41
(a) Analysis. 41
(b) Conclusion. 44
JUDGMENT. 47
I. Introduction and Background
[1] On the 22nd of November 2010, Signalgene R&D Inc filed an application in this Court seeking judicial review in the following terms:
This is an application for judicial review in respect of an act or proceeding by the Minister of National Revenue (the “Minister”), specifically the verbal refusal (the “Refusal”) on October 26, 2010 of a request to issue notices of determination (the “Notices of Determination”) of the amount of the Applicant’s refundable investment tax credits for each of the April 20, 1997, December 31, 1997, December 31, 1998 and December 31, 1999 taxation years.
The Applicant makes application for a review of the Refusal and an Order requiring the Minister to issue Notices of Determination which the Minister has unlawfully failed to do or has unreasonably delayed in doing.
The grounds for the Application are:
a) the Minister refused to exercise its jurisdiction by refusing to issue the Notices of Determination;
b) the Minister erred in law in making the Refusal;
c) the Minister based the Refusal on an erroneous finding of fact that the Minister made in a perverse or capricious manner or without regard for the material before the Minister; and
d) the Minister acted in a way contrary to the law.
…..
Pursuant to subsection 317(1) of the Federal Courts Rules, SOR/98-106, the Applicant requests material relevant to this application that is in the possession of the Respondent, and not in the possession of the Applicant, specifically all documents related to the Refusal.
[Emphasis added]
[2] The application for judicial review makes reference to a verbal refusal of October 26th 2010 of a request to issue Notices of Determination. That communication was a telephone message from Guylaine Gaudreault, then Acting Assistant Director of the Scientific research and experimental development (SR&ED) expenditures division of the Montréal Taxation Office of Canada Revenue Agency (CRA) and the decision-maker in this case to Evelyn Moskowitz, partner in KPMG and in that accounting firm’s affiliated law firm who was advising Signalgene. A transcription of the telephone message reads:
Hello, Evy, Guylaine Gaudreault. Sorry for the long delay in replying to your letter of September 23rd. I finally took the afternoon yesterday to go through your file. Essentially, what I have in the file is that a Notice of Objection was filed for the ’97 year, and it was closed with the mention that the appeal was not valid, and then a request was made in October/03 to modify certain tax credit rates, and according to the notes in the system, this was rejected in February/04, and now we have your request. My problem is that I am not in a position to issue a Notice of Determination because the company is not in a loss position. And, essentially, because it is statute-barred, I’m not in a position to issue a Determination that would re-open the year. I’ve been told by people that I have spoken to here that I’m not authorized to do that. So, essentially, I don’t have a [sic] good news for your case. I think the only way that you can present your case and be heard is to go to the Federal Court, I believe. So, anyways, if you want to call me back, I’m in and out, but’d be more than happy to talk to you and here again I apologize for the delay. You’ll be getting something in writing very soon.
Thank you.
[Emphasis added]
[3] On December 1, 2010, Ms. Gaudreault sent Ms Moskowitz the following letter:
We are responding to your letter of September 23, 2010 in which you requested that the Canada Revenue Agency (CRA) either make the payment Refundable ITCs (RITCs) to which you believe that the Corporation is entitled or issue a Notice of Determination of the RITCs for each of the relevant years.
We have examined our records and our conclusion concerning your requests has not changed. We therefore maintain our response which was expressed to you in our letter dated July 27, 2010.
[Emphasis added]
[4] The reference by Guylaine Gaudreault to Mrs. Moskowitz’s September 23, 2010 letter to her is important in context because in that letter Evelyn Moskowitz was responding to a decision Guylaine Gaudreault made on July 27, 2010, which reads:
We are responding to your letter of September 22, 2008 in which you requested refundable Investment Tax Credits (RITCs) in the four tax years of the Société Algène R&D Inc ending from 1997 to 1999. This letter was accompanied by a binder containing one new T2 Return for each of those tax years and each T2 was changing the taxable income previously assessed by the CRA.
Our view of the CRA’s records indicates that the CRA has already reviewed the claims for ITCs. Your request for refundables ITCs was filed after each of the statute-barred date applying and therefore it cannot be accepted. Furthermore, your request does not meet the conditions under which CRA would be authorized to reassess.
[Emphasis added]
[5] The nature of the September 22, 2008 request made by KPMG on behalf of Signalgene to CRA is also pivotal to this case because it was made shortly after the Federal Court of Appeal had dismissed from the bench an appeal by the Minister from the Tax Court of Canada’s decision in Perfect Fry of March 6, 2007 reported at 2007 TCC 133.
[6] Signalgene through KPMG on September 22, 2008 made a claim for refundable investment tax (RITCs) credits for Signalgene’s taxation years ended April 30, 1997, December 31, 1997, December 31, 1998 and December 31, 1999 (the Relevant Taxation Years).
[7] Signalgene’s claim for RITCs was made in two ways. For taxation year ended April 30, 1997, Signalgene renewed or reasserted its claim for the RITCs made in October of 2003 which CRA had denied ruling on May 28, 2004 the Notice of Objection filed against CRA’s refusal of February 6, 2004 was invalid as not being a Notice of Determination or a Notice of Reassessment. Second, in respect of all other taxation years, KPMG filed amended income tax returns claiming for the first time RITCs in those other taxation years.
[8] CRA’s letter of July 27, 2010 constituted a rejection of all of Signalgene’s RITCs claims.
[9] In her affidavit in support of Signalgene’s judicial review application, Mrs. Moskowitz deposed the following in respect of her September 23, 2010 letter in response to the July 27, 2010 RITCs claim denial:
(a) She explained CRA’s assertion that the Claims could not be accepted because they were statute-barred was contrary to the TCC’s decision in Perfect Fry (which she said, had been accepted by the FCA without further comment on the issue). More specifically, she referred to paragraphs in the TCC judgment that made it clear that:
• there is no requirement that a claim for RITCs be made within the normal reassessment period; and
• under the combined provision of subsection 127.1 and paragraph 152(1)(b) of the Act, the required response to a claim for RITCs is for the CRA to “determine” the amount of RITCs to which the taxpayer is entitled – not to “assess” it – and that the time period for issuing such a determination is not subject to the normal reassessment period.
(b) She stated that the July 27, 2010 Letter was not a “determination” for these purposes because it had simply advised of the CRA’s decision to not “accept” the Claims (based on its statute-barred argument). Having thus refused to even look at the Claims, the CRA had made no determination as to the amount of the RITCs to which it believed the Applicant was entitled. (This position was consistent with the CRA’s own position with respect to the February 6th 2004 letter – i.e., a letter refusing to accept an RITC claim was not a notice of determination.)
(c) She requested that the CRA issue of Notice of Determination for each of the Relevant Years, setting out the amount of RITCs to which the CRA believed the Applicant was entitled for each such year.
[Emphasis added]
[10] On October 21, 2010, not having had a response from CRA, Mrs. Moskowitz filed a Notice of Objection to the July 27, 2010 letter but, in her covering letter she stated July 27, 2010 letter of response was not a Notice of Determination and that Signalgene was filing the Notice of Objection as a protective measure in the event CRA took a contrary view.
II. The relevant statutory regime
[11] Under the Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)) (the Act), a taxpayer who incurs SR&ED expenses in a particular taxation year is entitled to claim investment tax credits for those expenditures in addition to claiming the SR&ED expenses themselves.
[12] There are two types of investment tax credits for SR&ED expenses which operate in different wayb: ordinary investment tax credits (ITCs) and refundable investment tax credits (RITCs). Ordinary ITCs not used to offset federal tax payable in a year may be carried forward for a period of years or carried back three years to offset tax payable in those years.
[13] RITCs are only available for a taxpayer who is a “Canadian controlled private corporation” (CCPC) as defined in the Act. Where the taxpayer is a CCPC, and its taxable income for the previous year does not exceed a certain threshold amount, the taxpayer is generally entitled to both a higher rate of ITCs and to an immediate refund of those tax credits to the extent they exceed the taxpayer’s federal taxes payable for the taxation year in question. Unlike excess ITCs, excess RITCs are not carried forward (or back) to offset federal taxed payable in other taxation year. Instead, they are immediately paid out to the taxpayer with the assessment of its Part I tax as a “refund” of taxes that the taxpayer is deemed to have paid in respect of the particular taxation year (the Deemed Overpayment). Under section 127.1(1) of the Act no Deemed Overpayment (and no consequent entitlement to an RITC refund) arises unless the taxpayer files certain prescribed forms and information with the Minister.
[14] In terms of the statutory provisions, the point of departure is section 127.1(1) entitled Refundable investment tax credit, it reads:
127.1 (1) Where a taxpayer (other than a person exempt from tax under section 149) files
(a) with the taxpayer’s return of income (other than a return of income filed under subsection 70(2) or 104(23), paragraph 128(2)(f) or subsection 150(4)) for a taxation year, or
(b) with a prescribed form amending a return referred to in paragraph 127.1(1)(a) a prescribed form containing prescribed information, the taxpayer is deemed to have paid on the taxpayer’s balance-due day for the year an amount on account of the taxpayer’s tax payable under this Part for the year equal to the lesser of
(c) the taxpayer’s refundable investment tax credit for the year, and
(d) the amount designated by the taxpayer in the prescribed form.
127.1 (1) Lorsqu’un contribuable (à l’exception d’une personne exonérée d’impôt en vertu de l’article 149) présente :
a) avec sa déclaration de revenu produite pour une année d’imposition, à l’exception d’une déclaration de revenu produite en vertu des paragraphes 70(2) ou 104(23), de l’alinéa 128(2) f) ou du paragraphe 150(4);
b) avec un formulaire prescrit modifiant une déclaration visée à l’alinéa a), un formulaire prescrit contenant les renseignements prescrits, il est réputé avoir payé, à la date d’exigibilité du solde qui lui est applicable pour l’année, une somme au titre de son impôt payable pour l’année en vertu de la présente partie égale à son crédit d’impôt à l’investissement remboursable pour l’année ou, s’il est inférieur, au montant qu’il a indiqué dans le formulaire prescrit.
[Emphasis added]
[15] Section 152(1) of the Act is entitled “Assessment” and its subsection 152(1)(b) keys into section 127.1(1) above. It reads:
152. (1) The Minister shall, with all due dispatch, examine a taxpayer’s return of income for a taxation year, assess the tax for the year, the interest and penalties, if any, payable and determine
(a) the amount of refund, if any, to which the taxpayer may be entitled by virtue of section 129, 131, 132 or 133 for the year; or
(b) the amount of tax, if any, deemed by subsection 120(2) or (2.2), 122.5(3), 122.51(2), 122.7(2) or (3), 125.4(3), 125.5(3), 127.1(1), 127.41(3) or 210.2(3) or (4) to be paid on account of the taxpayer’s tax payable under this Part for the year.
152. (1) Le ministre, avec diligence, examine la déclaration de revenu d’un contribuable pour une année d’imposition, fixe l’impôt pour l’année, ainsi que les intérêts et les pénalités éventuels payables et détermine :
a) le montant du remboursement éventuel auquel il a droit en vertu des articles 129, 131, 132 ou 133, pour l’année;
b) le montant d’impôt qui est réputé, par les paragraphes 120(2) ou (2.2), 122.5(3), 122.51(2), 122.7(2) ou (3), 125.4(3), 125.5(3), 127.1(1), 127.41(3) ou 210.2(3) ou (4), avoir été payé au titre de l’impôt payable par le contribuable en vertu de la présente partie pour l’année.
[Emphasis added]
[16] Section 152(1.2) provides that statutory provisions as they relate to an assessment or a reassessment and to assessing and reassessing tax apply to a determination or re-determination of an amount under this division. It reads:
(1.2) Paragraphs 56(1)(l) and 60(o), this Division and Division J, as they relate to an assessment or a reassessment and to assessing or reassessing tax, apply, with any modifications that the circumstances require, to a determination or redetermination under subsection (1.01) and to a determination or redetermination of an amount under this Division or an amount deemed under section 122.61 to be an overpayment on account of a taxpayer’s liability under this Part, except that
(a) subsections (1) and (2) do not apply to determinations made under subsections (1.01), (1.1) and (1.11);
(b) an original determination of a taxpayer’s non-capital loss, net capital loss, restricted farm loss, farm loss or limited partnership loss for a taxation year may be made by the Minister only at the request of the taxpayer; and
(c) subsection 164(4.1) does not apply to a determination made under subsection 152(1.4).
(1.2) Les alinéas 56(1)l) et 60o), la présente section et la section J, dans la mesure où ces dispositions portent sur une cotisation ou une nouvelle cotisation ou sur l’établissement d’une cotisation ou d’une nouvelle cotisation concernant l’impôt, s’appliquent, avec les adaptations nécessaires, à toute détermination ou nouvelle détermination effectuée selon le paragraphe (1.01) et aux montants déterminés ou déterminés de nouveau en application de la présente section ou aux montants qui sont réputés par l’article 122.61 être des paiements en trop au titre des sommes dont un contribuable est redevable en vertu de la présente partie. Toutefois :
a) les paragraphes (1) et (2) ne s’appliquent pas aux déterminations ou aux montants déterminés en application des paragraphes (1.01), (1.1) et (1.11);
b) le montant d’une perte autre qu’une perte en capital, d’une perte en capital nette, d’une perte agricole restreinte, d’une perte agricole ou d’une perte comme commanditaire subie par un contribuable pour une année d’imposition ne peut être initialement déterminé par le ministre qu’à la demande du contribuable;
c) le paragraphe 164(4.1) ne s’applique pas aux montants déterminés en application du paragraphe (1.4).
[Emphasis added]
[17] Section 152(2) of the Act headed “Notice of Assessment” reads:
(2) After examination of a return, the Minister shall send a notice of assessment to the person by whom the return was filed.
(2) Après examen d’une déclaration, le ministre envoie un avis de cotisation à la personne qui a produit la déclaration.
[Emphasis added]
III. Facts
[18] Throughout the Relevant Taxation Years Signalgene:
(1) Was a sole purpose research and development company that carried a scientific research and experimental development activities in connection with which it incurred SR&ED expenses.
(2) Filed its initial income tax returns (1) on September 26, 1997 for its April 1997 taxation year (2) on May 22, 1998 for its December 31, 1997 taxation year (3) on June 29, 1999 for its December 31, 1998 taxation year and (4) on June 29, 2000 for its December 31, 1999 taxation year (the relevant taxation years).
[19] For each of the relevant taxation years Signalgene claimed the deduction of SR&ED expenses as well as ITCs. It did not claim any RITCs being of the belief same, as Perfect Fry was, that it was not a CCPC but rather a corporation controlled by a public corporation (a Non-CCPC) and therefore not eligible to claim RITCs. [Emphasis added]
[20] CRA assessed each of Signalgene’s initial returns and generally accepted the amounts claimed leading to the issuance of Notice of Assessment; in each case, it was CRA’s practice to audit the SR&ED expenses claimed. Subsequent to audits, in a few cases involving Signalgene, the audit led to the issuance of a Notice of Reassessment of previous assessments. Both the initial assessment and the Reassessment could be challenged by filing Notices of Objection which provide an opportunity for internal review and subsequent appeals to the Courts.
[21] On or about October 29, 2001, Signalgene’s auditors sought to modify (1) its April 30, 1997 tax return so that the maximum of SR&ED expenses could be deducted from its net income (2) the ITCs previously deducted from its Part I tax payable be reduced to zero (3) the amount of undeducted ITCs be fixed at $451,076 and (4) a non-capital loss be established in the same account. On September 16, 2002, CRA rejected the modifications sought on the ground the request did not comply with the conditions set out in Information Canada 84-1 paragraph 9. Signalgene did not take the matter further.
[22] The first time Signalgene claimed RITCs was on or about October 30, 2003 when KPMG filed an amended tax return for Signalgene’s taxation year ended April 1997. In their view, the Federal Court of Appeal’s recent 1997 decision in Parthenon Investments Ltd v The Minister of National Revenue, 97 DTC 5343, meant that Signalgene qualified as a CCPC and thus eligible for RITC tax credits.
[23] KPMG requested the Minister, pursuant to subsection 152(1)(b) of the Act, to determine the amount of tax deemed to have been paid pursuant to subsection 127.1(1) on account of Signalgene’s payable taxes for its April 1997 tax year in order to enable the Minister to refund any excess as authorized by section 164(1)(b). KPMG pointed out the Act authorized Signalgene to file a refund request within a six year window quoting subsections 152(4) and 152(6) of the Act.
[24] CRA advised Signalgene on February 6, 2004 it could not accept the T-2038 amendment because it was filed 18 months after the end of its August 30, 1997 taxation year. On May 4, 2004, Signalgene filed a Notice of Objection which ultimately was rejected by CRA Appeals on May 28, 2004 on the ground that CRA’s February 6, 2004 response was neither a Notice of Determination nor a Notice of Reassessment and therefore its Notice of Objection was not a valid one. The matter was not pursued by Signalgene on the advise of its auditors who were also involved in a case which was before the Tax Court, known as the Perfect Fry Case, which raised similar issues, and, in particular, (1) the Minister, in that case, was arguing a contrary position to the one taken in this case i.e. that an analogous response to the one which Signalgene received on February 6, 2004 could support a Notice of Objection (2) Perfect Fry had a similar tax profile in terms of CCPC qualifications and (3) the issue of the 18 month bar was similarly at play.
[25] It is important to describe how the Perfect Fry Case reached the Tax Court. That company (1) carried on SR&ED activities throughout its taxation years from October 31, 1993 to October 31, 1998 for which it claimed SR&ED expenses as well as ITCs but not RITCs believing it was a Non-CPPC but (2) changed its mind based on the FCA’s decision in the Parthenon case instructing its auditors KPMG to seek appropriate amendments to its initial return (3) which its auditors did on August 9, 2001 filing amended T-2038 forms containing the prescribed information.
[26] On December 12, 2002, the CRA issued a Notice of Determination to Perfect Fry stating the amount of RITCs Perfect Fry was entitled was zero which lead its auditors to file a Notice of Objection against the determination on March 12, 2003 for which it received Notices of Reassessment for all relevant years. Perfect Fry was partial successful before CRA appeals; it obtained RITCs for all years except 1996, 1997 and 1998, hence the appeal to the Tax Court which Justice Paris decided on March 6, 2007. The Minister’s appeal to the Federal Court of Appeal was dismissed from the Bench on June 18, 2008.
[27] The other important events after Signalgene’s request on September 22, 2008 for RITCs, were (1) CRA’s Montreal Tax office’s referral on July 23, 2009 to CRA-HQ in Ottawa of certain questions arising out of Signalgene’s September 2008 RITC claim (2) the answer back on July 14, 2010 from CRA’s Technical Guidance Decision to Brigitte Gener, a senior Financial reviewer at Montreal TSO (3) Guylaine Gaudreault’s letter of July 27, 2010 denying Signalgene’s RITC claims for the Relevant Taxation Years (4) Evelyn Moskowitz’s letter of September 23, 2010 letter to Guylaine Gaudreault in which she questioned the reasons for rejection and a request for the issuance of Notices of Determination have previously been set out in full in the early part of these reasons and (5) the Directive issued on August 13, 2010 by the Director of the Policy Division of the SR&ED Directorate in Ottawa to all Taxation Offices.
IV. The Affidavits
[28] Two affidavits were filed in support of the Minister’s position: (1) the affidavit of Guylaine Gaudreault, the decision-maker in this proceeding and the affidavit of Brigitte Gener, Senior Fiscal Analyst at CRA Montreal TSO who was mandated to review and make recommendations on Signalgene’s RITC claim of September 2008; she also requested CRA-HQ’s input and drafted the July 27, 2010 response for Guylaine Gaudreault’s signature. Both affiants were extensively cross-examined.
[29] Signalgene’s position was supported by the affidavit of Evelyn Moskowitz whose background has been previously described in these reasons. She was not cross-examined. Guylaine Gaudreault said in her cross-examination she agreed with the contents of Ms. Moskowitz’s affidavit except for a few items which do not affect the outcome of this case.
[30] It was in Guylaine Gaudreault’s affidavit that the basis of the Minister’s defence to this judicial review application emerged.
(a) The affidavit of Guylaine Gaudreault
[31] The main points made by the decision-maker may be summarized as follows:
(1) She described the nature of Signalgene’s September 22, 2008 claim for RITCs as requiring changes to previous tax filings in order:
(a) to recognize it as a “Canadian-controlled private corporation” (“CCPC”) for each of the relevant taxation years;
(b) to modify the computation of its net income, its taxable income and its Part I Tax for each of the relevant taxation years;
(c) to modify the rate at which it earned its Investment Tax Credits (“ITC”) for each of the relevant taxation years, from a 20% rate to a 35% rate; and
(d) to allow and pay the RITCs it claimed for each of the relevant taxation years.
(2) Stated the only issue raised in Signalgene’s request was whether it is possible for the Applicant to modify the Income Tax Returns it initially filed for each of the relevant taxation years in order to apply the changes described above.
(3) Acknowledged that on or about July 23, 2009 CRA’s Montreal SR&ED Division decided to consult CRA-HQ in Ottawa on certain technical issues arising from Signalgene’s September 22, 2008, request; HQ’s response was provided in July 2010 which following internal consultations with Senior SR&ED division staff at the Montreal TSO led her to finally come to the conclusion that:
(a) CRA had already reviewed the Applicant’s claims for ITCs for each of the relevant taxation years during the audits performed for each year;
(b) the Amended Income Tax Returns could not be accepted because they were filed after the statute-barred date applying for each year, and therefore the Applicant could not modify its net income, its taxable income and its Part I Tax for each of the relevant years; and
(c) the Amended Income Tax Returns did not meet the conditions under which CRA is authorized to reassess after the statute-barred date, as per Information Circular IC84-1.
(4) Those conclusions were communicated to Signalgene in her letter of July 27, 2010.
(5) Deposed that on September 23, 2010, she received a new second request from Evelyn Moskowitz; (1) making additional submissions on the merits of the issue that the taxation years at issue were not statute-barred; (2) requesting CRA issue a Notice of Determination for the relevant years setting out the amount of RITCs to which CRA believed Signalgene was entitled; and (3) after conducting appropriate internal consultations decided she had no obligation to issue the requested Notices of Determination for the following reasons:
(a) RITCs are refundable in the taxation year in which they are earned and therefore, by their nature, they cannot be carried forward;
(b) if a taxpayer is entitled to any RITCs for a given taxation year, they are either applied against its Part I Tax payable for the year, or are immediately refunded to the taxpayer with the assessment of its Part I Tax;
(c) if the taxpayer did not claim any RITCs for a given taxation year and did not receive any refund of RITCs for that same year upon it being assessed, the taxpayer is reasonably informed at that time that it is entitled to no RITCs for the year;
(d) CRA had already reviewed the Applicant’s claims for ITCs for each of the relevant taxation years during the audits performed for each year; and
(e) Since the Applicant’s RITCs had already been determined to be nil for its April 30, 1997, December 31, 1997, December 31, 1998 and December 31, 1999 taxation years, the years were statute-barred and she had no obligation to issue such a Notice of Determination for any of the relevant years.
(6) And expressed her conclusion in the December 1, 2010 letter to Mrs. Moskowitz that she stood by her July 27, 2010 response.
(b) The affidavit of Brigitte Gener
[32] Brigitte Gener also deposed an affidavit to which was appended all of the available documentation held by CRA relevant to the issues in this case. As noted, she was mandated to review Signalgene’s RITCs request of September 22nd, 2008. She described the documents submitted by Signalgene in support of its request and, in particular, the amended Income Tax Returns with relevant schedules and forms for all tax year involved.
[33] She noted Signalgene had previous to its RITCs request filed initial income tax returns in which it is indicated, amongst other things, that:
(1) it was a Non-CCPC;
(2) it had a different net income, taxable income and Part I Tax for each of the relevant taxation years;
(3) it earned its ITCs at a 20% rate, and was not entitled to earn ITCs at a 35% rate, and
(4) it was not entitled to any RITCs and that it did not calculate or claim any RITCs for each of the relevant taxation years.
[34] She recognized that the September 22, 2008 Signalgene request was the first request for RITCs for its December 1997, 1998 and 1999 taxation years and the only way to allow that request was:
(1) to recognize the Applicant as a CCPC for each of the relevant taxation years;
(2) to modify the computation of the Applicant’s net income, its taxable income and its Part I Tax for each of the relevant taxation years; and
(3) to modify the rate at which the Applicant earned its ITCs for each of the relevant taxation years, from a 20% rate to a 35% rate.
[35] She also expressed the view Signalgene’s September 2008 request was a departure from both its tax planning and the manner in which it was assessed and reassessed for each of the Relevant Taxation Years prior to the September 2008 request.
[36] She explained that (1) deductions of both SR&ED Expenditures and ITCs are elective meaning a taxpayer may or may not choose to deduct such amounts in any given taxation year (2) SR&ED expenses are deductible in the compilation of net income and any undeducted amount of SR&ED expenses may be carried forward for deduction over an unlimited number of future taxation years unlike ITCs which are deducted from the compilation of its Part I Tax and any undeducted amount of ITCs undeducted amount of ITCs may be carried back for three years or carried forward over the subsequent 10 years and if not so deducted are lost (or expire).
[37] She also recognized in her affidavit at paragraph 15 Signalgene in its initial filing neither calculated nor claimed any RITCs and calculated its ITCs at the rate of 20% versus 30% for RITCs. She also explained Signalgene’s tax strategy prior to its September 2008 RITCs requests, namely, an election to deduct no more that the minimum of SR&ED expenses necessary to bring its net income to a level which would allow it to deduct the maximum of ITCs against its Part I Tax and in doing so Signalgene generally deducted the ITCs which would otherwise expire after the 10 year period and preserved its SR&ED expenses which never expire. Brigitte Gener indicated Signalgene was assessed in conformity with its tax planning.
[38] She identified the modifications which would have to be made to Signalgene’s SR&ED expenses and to its declared ITCs at the end of each relevant taxation year in order to implement its request of September 22, 2008 writing at paragraph 25:
The modifications sought in its Amended Income Tax Returns filed with the Applicant’s Request are necessary to overcome limitations in the ITA which would otherwise preclude it from being entitled to the amount of RITCs it calculated for the years at issue. However, all of the relevant taxation years are now statute-barred. It is therefore too late for the Applicant to obtain those modifications.
[39] She appends as Exhibit #13 to her affidavit the response she received from the Technical Guidance Branch to her July 2009 request for advice which after discussion at the Montreal TSO the conclusions were set out in her July 29, 2010 audit report.
[40] In particular (1) she identifies for each relevant year when the tax year became statute-barred (2) states no RITCs were allowed to Signalgene in CRA’s initial assessment, adding Signalgene’s RITCs cannot be negative and “therefore they were determined to be nil in the initial assessment.” [Emphasis added] (3) states the audits for each relevant years had the same impact adding “the result of the audits resulted in the RITCs being established at nil which is reflected in the two reassessments issued during the relevant years since for a relevant taxation year RITCs cannot be negative, they were established to be nil.”
[41] She deposes Signalgene did not object in a timely way to any assessments, audits or reassessments.
[42] She then refers to various Information Circulars to conclude the conditions set out therein do not allow CRA to modify Signalgene’s taxable income or to reassess it. She concludes Signalgene’s September 22, 2008 request constitutes retroactive tax planning pursuant to which Signalgene is attempting to modify its net income, its taxable income and its Part I tax in order to allow it to calculate amounts of RITCs it would otherwise not be entitled to.
[43] She acknowledges being the author of the July 27, 2010 refusal (signed by Guylaine Gaudreault) which reasoned:
(1) CRA records indicate that it had already reviewed the claims;
(2) the RITC request was filed after the statute-barred date and that it could therefore not be accepted; and
(3) the request does not meet the conditions under which the CRA is authorized to reassess.
V. The cross-examinations of the Respondent’s affidavits
(a) Guylaine Gaudreault cross-examination
[44] The cross-examination of Guylaine Gaudreault on her affidavit covers 195 pages of transcript. For the purpose of these reasons only the essential points are referred to.
[45] First, she maintained a Notice of Assessment (or reassessment) is a deemed Notice of Determination of the amount of RITC Signalgene is entitled to “L’avis de cotisation fait foi de l’avis de détermination des credits d’impôt”. The following exchange took place between counsel for Signalgene and the affiant:
Q. [172] And that was your decision when you refused to issue one in November of two thousand and then (2010)?
A. My decision was I didn’t have to issue one for years that were statute-barred because the Notice of Assessment is also a Notice of Determination for the RITC for SR&Ed purposes.
[Emphasis added]
[46] She explained she made the link between a Notice of Assessment and a Notice of Determination for RITCs purposes because of the manner RITCs work. At page 271 of the Applicant’s record she answered:
As I said earlier, when the Notice of Assessment is issued, if a taxpayer is entitled to RITC and it’s refundable, he gets it right away. It’s not carried forward or whatever.
[167] So, is it the CRA’s position and was it your position when you were making your decision in November of two thousand and ten (2010) that Notices of Determination had been issued year before to Signalgene?
Yes
[47] At page 301 of the Applicant’s record she explained that a Notice of Assessment stands in lieu of an official Notice of Determination because what it did was to inform the taxpayer its RITCs were nil.
[48] It was on this basis she recognized that a taxpayer receives a Notice of Determination for RITCs it did not claim and did not request i.e. a determination of the amount of tax deemed to have been paid on account (Applicant’s record p. 272). She also recognized September 23, 2010 was the first time Signalgene had requested such a determination.
[49] At page 271 of the Applicant’s record, she agreed the issuance of a Notice of Determination affords a taxpayer the right to object to a determination of RITCs by CRA.
[50] She further explained her position at page 270 of the Applicant’s record:
A. Okay. So, I had no obligation to put in writing again that the RITC was nil, and this is linked to the fact that we were looking at very old years and you have to look at the ITA dans son ensemble. And by issuing a new Notice of Determination to which I was not obligated to do, I was giving a right to appeal to a taxpayer that should not have a right because the years were too old.
Q. [162] So, you would agree that a taxpayer has a right to appeal once a Notice of Determination is issued?
A. I would say yes because it would reopen statute-barred years.
Q. [163] Let’s put aside statute-barred years. I’m just talking…
A. It’s the crux of the matter, sir.
[51] She added another reason in support of the fact CRA had made a determination of RITCs in this case. She referred to an audit of Signalgene’s returns in which the company was informed its RITCs were zero (Applicant’s record p. 254).
[52] When she received Ms. Moskowitz’s letter of September 23, 2010 seeking a Notice of Determination, she said the question was whether a Notice of Determination had been issued or not (Applicant’s record p. 276) adding what troubled her in this case was it appeared to be retroactive tax planning on Signalgene’s case (Applicant’s record p. 277).
[53] She expressed the view the Perfect Fry Case was different based on the facts of that case.
[54] I set out some of the other important points made during her cross-examination.
[55] First, she conceded prior to the Signalgene request she had never dealt with a Notice of Determination or whether there were prescribed forms. To her that did not matter. What matters is that an RITC is refundable and cannot be carried forward and if CRA tells a taxpayer his RITC is zero or no cheque is issued that is sufficient; if the taxpayer did not claim any RITCs for a given tax year and did not receive any refund he/she is reasonably informed that he is entitled to no RITCs (Applicant’s record p. 255 to 279).
[56] Second, at page 406 of the Applicant’s record she recognized that statute-barred is not an issue with respect to a request for refund under section 127.1 of the Act. Such a request can be made under section 127.1 at any time adding “it does not mean it’s accepted”.
[57] Third, for the request by Signalgene for a Notice Determination did not affect and is independent of her previous decision of July 27, 2010 (see also Applicant’s record p. 281, 282-300).
[58] Fourth, she was taken to the July 14, 2010 CRA-HQ response to the questions asked by Brigitte Gener on July 23, 2009. Her attention was drawn to the heading entitled “concerning the normal redetermination period for refundable ITCs” and to an Income Tax Ruling internal interpretation 2001-0109817(E) (the February 2002 Tax Ruling) which suggests that where there is no claim for a refundable ITC pursuant to subsection 127.1 there has been no determination of the amount deemed to have been paid in that respect. She answered she had no recollection of that issue being discussed (Applicant’s record p. 303-304).
(b) Brigitte Gener Cross-examination
[59] The essential points of her cross-examination are the following.
[60] First, the question which was put to Guylaine Gaudreault was also put to Brigitte Gener whether an assessment of a nil amount indicated for RITCs in the initial T-2038 filing by a taxpayer constituted a determination in respect of subsection 127.1(1) in the light of the February 2002 Tax Ruling. Brigitte Gener said she was familiar with the issue discussed in the response she received from CRA-HQ dated July 14, 2010; she, however, challenged the view expressed there.
[61] She did so, on the basis of another interpretation bulletin also dated February 13, 2002 and bearing the same identification number as mentioned in CRA-HQ’s response of July 14, 2010.
[62] During cross-examination, it was established the document she had, while supporting her position, was incomplete and the one upon which CRA-HQ had relied on was the correct document. Brigitte Gener never put the correct document (which she did not have) before the decision-maker, a document which established that in the view of CRA Rulings the assessment of a nil return was not a determination by the Minister under section 127.1(1) of the Act and consequently a Notice of Assessment of that nil amount could not be a Notice of Determination (see Applicant’s record p. 210-223).
[63] Second, she recognized in reviewing the entire Signalgene file she had found a request for a determination under subsection 152(1)(b) of the Act had been made by Sylvain Charest of KPMG on behalf of Signalgene on October 20, 2003 whi