Worsfold v. Canada (National Revenue)

Worsfold v. Canada (National Revenue)
Court (s) Database
Federal Court Decisions
Date
2012-05-25
Neutral citation
2012 FC 644
File numbers
T-1944-10
Decision Content
Federal Court
Cour fédérale
Date: 20120525
Docket: T-1944-10
Citation: 2012 FC 644
Ottawa, Ontario, May 25, 2012
PRESENT: The Honourable Mr. Justice O'Keefe
BETWEEN:
GRAHAM WORSFOLD, STONERIDGE MANAGMEENT SERVICES INC.,
LYN WORSFOLD, JONATHAN COLES AS TRUSTEES FOR GR AND LS WORSFOLD LIFE INTEREST SETTLEMENT TRUST
Applicants
and
THE MINISTER OF NATIONAL REVENUE
Respondent
REASONS FOR JUDGMENT AND JUDGMENT
[1] This is a consolidated application under subsection 18.1(1) of the Federal Courts Act, RSC 1985, c F-7 for judicial review of the second level review decisions by an assistant director of enforcement of the Minister of National Revenue (the officer), made between October 22, 2010 and November 17, 2010, refusing to waive the penalties and interest owed by the applicants as a result of the late filing of their tax returns. The decisions not to exercise the discretion under subsection 220(3.1) of the Income Tax Act, RSC 1985, c 1 (5th Supp) to reduce the penalties and interest were based on the officer’s finding that the applicants’ disclosures were not voluntary as they were prompted by enforcement action against a related company.
[2] The applicants request that the decisions be set aside and sent back for reconsideration with directions that this Court deems appropriate.
Introduction to Voluntary Disclosure Program
Taxpayer Relief Provision
[3] Taxpayers that file late tax returns generally incur penalties and interest on the payments. However, subsection 220(3.1) of the Income Tax Act grants the Minister the discretion to cancel or waive all or any portion of any penalty or interest otherwise payable under the Act. This taxpayer relief provision was introduced in 1991 as part of what was called a fairness package (see Bozzer v Canada (Minister of National Revenue), 2011 FCA 186, [2011] FCJ No 842 at paragraph 22). The purpose of this provision was articulated by Mr. Justice Paul Rouleau in Kaiser v Canada (Minister of National Revenue), 93 FTR 66, [1995] FCJ No 349 (at paragraph 8):
The purpose of this legislative provision is to allow Revenue Canada, Taxation, to administer the tax system more fairly, by allowing for the application of common sense in dealing with taxpayers who, because of personal misfortune or circumstances beyond their control, are unable to meet deadlines or comply with rules under the tax system […]
[4] Granting of relief under this provision is discretionary. It is not available as of right (see Lanno v Canada (Customs and Revenue Agency), 2005 FCA 153, [2005] FCJ No 714 at paragraph 6).
Voluntary Disclosure Program
[5] The exercise of the discretion under subsection 220(3.1) of the Income Tax Act is integral to the Canada Revenue Agency (CRA)’s voluntary disclosure program (VDP). The VDP allows taxpayers to make disclosures to correct inaccurate or incomplete information, or to disclose information not previously reported. This program is intended to promote voluntary compliance. Therefore, when a valid disclosure has been made, the Minister may exercise its discretion under subsection 220(3.1) to cancel or waive associated penalties and interest.
Applicable CRA Policies
[6] The CRA has published policy documents to assist the Minister and its delegates with the exercise of its discretion under subsection 220(3.1) of the Income Tax Act. At the time of the applicants’ disclosures in 2005, the following documents pertinent to this exercise of discretion and the VDP were in effect:
1. CRA Information Circular IC00-1R, effective from September 30, 2002 to October 21, 2007 (the IC00-1R); and
2. VDP Processing Guidelines (the Guidelines).
[7] The Guidelines are an internal CRA document intended to assist VDP officers in exercising their functions.
Conditions for Valid VDP Disclosures
[8] IC00-1R outlines four conditions for a disclosure to be deemed valid (at paragraph 6) – it must:
1. Be voluntary – meaning it must be initiated by the taxpayer and must not “have been made with the knowledge of an audit, investigation, or other enforcement action that has been initiated by the [CRA], or other authorities or administrations with which the [CRA] has information exchange agreements”;
2. Be complete – meaning it must include “full and accurate reporting of all previously inaccurate, incomplete, or unreported information”;
3. Involve a penalty – meaning if no penalties apply to the information being disclosed, the taxpayer does not need to seek penalty relief under the VDP; and
4. Meet timing conditions – meaning it must:
a. include information that is at least one year past due; or
b. if the information is not one year past due, the disclosure must not be initiated simply to avoid late filing or installment penalties.
Determining Voluntariness
[9] Guidance for a VDP officer’s determination of whether a disclosure is voluntary is provided under section 8.3 of the Guidelines. Subsection 8.3.1 states in part:
A disclosure is considered voluntary if a [taxpayer] has wholly initiated the disclosure in order to ensure his or her tax records are completed. A disclosure must meet this definition of voluntary in order to be considered as a valid voluntary disclosure. The following suggestions for research are guidelines only. […]
[10] The relevant date to the question of voluntary disclosure is the “effective date of disclosure”. This is the “date the taxpayer identifies himself or the date the taxpayer or his representative signs the client agreement form, whichever of the two is earliest” (see Brown v Canada (Customs and Revenue Agency), 2005 FC 1639, [2005] FCJ No 2087 at paragraph 16; affirmed in 2007 FCA 26, [2007] FCJ No 141).
Enforcement Action Questions
[11] When a VDP officer discovers that enforcement actions have commenced, section 8.3.5 of the Guidelines recommends that the officer answer the following set of questions (the enforcement action questions):
1. Was any direct contact made with the [taxpayer] or is the [taxpayer] likely to have been aware of the enforcement action?
2. Is it likely that the CRA would have uncovered the information disclosed based on the enforcement action?
[12] In assessing these questions, the Guidelines explicitly state that taxpayers should be given the benefit of the doubt (section 8.3.5).
Background
[13] Graham Worsfold is the principal applicant and a computer science engineer. In 2001, he moved to Canada from the United Kingdom (UK) under a temporary work permit. After renewing this permit on at least one occasion, the principal applicant and his family were granted permanent residency status in January 2005.
[14] The additional applicants in this case are: Lyn Worsfold – the principal applicant’s wife; Stoneridge Management Services Inc. (Stoneridge Management) – a company incorporated on December 16, 2003 in the British Virgin Islands that provides management consulting services on international computer development. The principal applicant is the sole director and shareholder, and has been employed by the company since 2004; and The GR and LS Worsfold Life Interest Settlement Trust (Worsfold Trust) – a personal family trust located in the UK and established in 1997 by the principal applicant. The trustees are the principal applicant, his wife and Jonathan Coles (a UK based lawyer).
[15] As of October 3, 2005, the applicants had not filed tax returns in Canada.
[16] This application also concerns Stoneridge Inc. (Stoneridge). Stoneridge is a real estate development company that was incorporated on August 1, 2002. The principal applicant does not receive employment income from Stoneridge. However, as of October 3, 2005, the principal applicant was a director, held all of the preferred shares of Stoneridge and held one third of the common shares of GLD Holdings Inc. which owns all the common shares of Stoneridge. Larry Burton and David Turk held equal parts of the remaining common shares of GLD Holdings Inc.
Timeline of Events
[17] On September 6, 2005, the principal applicant completed a tax amnesty form on the DioGuardi and Company LLP (DioGuardi) website. This entailed the provision of personal and financial information on the principal applicant’s worldwide income and immigration status. By completing this form, a request was also made for an assessment and legal opinion on his need and eligibility for a voluntary disclosure (tax amnesty).
[18] On September 21, 2005, DioGuardi sent the principal applicant an email stating they believed he needed to file tax returns and was eligible for a voluntary disclosure. The principal applicant was asked to contact their office.
[19] On September 23, 2005, the principal applicant called DioGuardi’s office. During this call, it became evident that an in-depth meeting was required. As the principal applicant was out of the country during the week of September 25 to 29, the meeting was scheduled for Wednesday, October 5, 2005.
[20] At 7:30 a.m. on Monday, October 3, 2005, CRA auditor Joanne Adey (the auditor) from the East Central Ontario (Peterborough) tax service office called Larry Burton, Stoneridge’s secretary and listed contact, to inform him that the CRA was planning to audit Stoneridge’s 2003 and 2004 tax returns. The purpose of the audit was to review property transactions, conduct a general review and review associated T2 corporation tax returns. The Stoneridge audit had been assigned to the auditor in the preceding week. Prior to speaking with Larry Burton, the auditor had left two voice messages to Larry Burton’s attention with her name and contact information. She had also spoken to his wife, with whom she also left her name and contact information.
[21] During the call on October 3, 2005, Larry Burton informed the auditor that the other two shareholders, the principal applicant and David Turk, ran Stoneridge. Larry Burton and the principal applicant work in the same building. Later the same morning, at 10:07 a.m., the principal applicant made a short call to DioGuardi. The principal applicant states that this call was to confirm the October 5th meeting. Conversely, the respondent suggests that this call was to schedule a meeting with DioGuardi in response to being informed by Larry Burton of the pending Stoneridge audit.
[22] On October 5, 2005, the principal applicant met with Paul DioGuardi at DioGuardi’s Ottawa office. Paul DioGuardi indicated that at this meeting, they discussed the tax implications of the principal applicant’s immigration status and his sources of income. From this discussion, Paul DioGuardi determined that a voluntary disclosure was necessary for the 2001 tax year onwards. The Stoneridge audit was allegedly not discussed at this meeting and the principal applicant maintains that at that time he still had no knowledge of the planned audit.
[23] In the same afternoon, at 3:25 p.m., the auditor faxed the initial audit letter to Brad Huggins, the corporate accountant for Stoneridge, requesting that specific books and records be ready for her to review at the beginning of the audit, scheduled for October 27, 2005. The end of this letter stated:
Please be advised that as the audit progresses, we may request additional records related to the associated companies and all respective shareholders. [emphasis added]
[24] Later the same day, at 4:25 p.m., Paul DioGuardi sent a fax to the CRA initiating a no-name voluntary disclosure for the 2001 to 2004 taxation years. This disclosure stated that it was on behalf of a male taxpayer, born in 1956 and resident of Canada since 2001. The disclosure was for unreported income and capital gains for the taxation years 2001 to 2004, and possibly GST.
[25] On November 17, 2005, Brad Huggins told the auditor that the principal applicant “was being investigated by Ottawa on international issues”. This investigation pertained to a letter from CRA London requesting information on a clearance certificate request for DigiPos shares disposed of by the principal applicant. As no information was submitted, this request was denied.
[26] On November 30, 2005, DioGuardi informed the CRA that the principal applicant was the individual behind the no-name disclosure made on October 5, 2005. DioGuardi also provided CRA with a memorandum from its accounting firm detailing additional research and returns to be filed for the principal applicant’s spouse, overseas trusts and various companies potentially deemed resident of Canada based on the principal applicant’s residency status.
[27] On August 31, 2006, after several extensions of time, the principal applicant’s tax returns and foreign information forms, along with tax returns for the other applicants, were filed with the CRA.
[28] On September 19, 2006, the applicants’ files were referred to the auditor for review to determine if the information was accurate and met the complete criterion under the VDP.
[29] In a memorandum dated April 26, 2007, the auditor recommended to Mark Loftus, VDP officer in Ottawa, that adjustments be made to the principal applicant’s income for the 2002 and 2003 taxation years. The auditor also found that the principal applicant had appropriated $315,451 from Stoneridge in 2004. The documents that the auditor used to support these adjustments were provided to her during her audit of Stoneridge.
First Level Review Decisions
[30] In letters dated September 25, 2007, the applicants were informed that all their VDP applications had been denied (the first level review decisions). The following issues were raised with their disclosures:
Principal applicant:
Not voluntary – CRA had initiated enforcement actions against a related taxpayer prior to the date of voluntary disclosure;
Not complete – material amounts of taxable income had not been properly included in the T1 returns; and
Timing – included information that was not one year past due.
Principal applicant’s wife:
Not voluntary – CRA had initiated enforcement actions against a related taxpayer prior to the date of voluntary disclosure; and
No penalty – included a year that did not involve a penalty.
Stoneridge Management:
Not voluntary – CRA had initiated enforcement actions against a related taxpayer prior to the date of voluntary disclosure;
No penalty – did not involve a penalty for some years; and
Timing – included information that was not one year past due.
Worsfold Trust:
Not voluntary – CRA had initiated enforcement actions against a related taxpayer prior to the date of voluntary disclosure; and
No penalty – did not involve a penalty for some of the years.
[31] Between April 25 and 28, 2008, all the applicants filed separate requests for second level reviews. The principal applicant’s request included a receipt dated September 6, 2005 from DioGuardi acknowledging a payment of $45 to cover an assessment and legal opinion fee.
Additional Submissions
[32] In letters dated October 5, 2009, July 30, 2010 and September 9, 2010, applicants’ counsel made additional submissions in support of their voluntary disclosures.
[33] The first letter (October 5, 2009) provided clarification on alleged inaccuracies, namely that:
1. The disclosure was not made as a reaction to the audit;
2. The principal applicant fully intended to make the disclosure;
3. The disclosure was materially complete; and
4. The audit did not sufficiently constitute an enforcement action on which to deem the disclosure involuntary.
[34] In the letter dated July 30, 2010, applicants’ counsel reviewed provisions in the Guidelines and applied them to the facts of this case. The voluntary aspect of disclosure, the completeness of the disclosure and the exercise of discretion were discussed. The following points were also included in this submission:
1. Email dated September 21, 2005 and apparently from Philippe DioGuardi to the principal applicant stating that “our opinion of your current tax situation” is that “you are eligible for a tax amnesty”;
2. Letter dated September 29, 2008 to the principal applicant from Dean McIntosh, investigator of the Enforcement Division of CRA. The letter proposes an adjustment of $132,606 to the principal applicant’s 2004 T1 general income tax and benefit return. The letter also states that penalties will be applied to this adjustment and sets out the basis for which the CRA proposed that charges be laid against the principal applicant under section 239 of the Income Tax Act; and
3. Notice of Reassessment from CRA dated November 12, 2008.
[35] Finally, the following documents were included in the letter dated September 9, 2010: 1. Letter from Brad Huggins, the corporate accountant for Stoneridge, to Dean McIntosh (dated August 5, 2008) with attachments:
a. CRA question sheet indicated that Brad Huggins likely had a call regarding the audit with Larry Burton on October 3, 2005, and had a conversation with the principal applicant on either October 3 or 4, 2005; and
b. Brad Huggins’ timesheet (for October 4 and 5, 2005) indicating that Brad Huggins had a call with Dave Turk on October 4, 2005: “Two hours, audit prep, call Dave T.”;
2. Bell print-outs of the principal applicant’s personal communications showing that he placed calls on September 23, 2005 and October 3, 2005 to DioGuardi Tax Law; and
3. Information to obtain production order which included:
a. References to the principal applicant’s journal in which an entry labeled “Brad” (from Stoneridge’s accounting firm) precedes an entry for DioGuardi (allegedly suggesting that the principal applicant communicated with Stoneridge’s accountant before touching base with DioGuardi).
b. Statement that Paul DioGuardi provided an affidavit claiming that he met with the principal applicant at 1:30 p.m. on October 5, 2005, at which time the principal applicant signed an agreement. No information was provided as to when the date of this meeting was set or whether it was arranged through the internet or a phone conversation.
Officer’s Decisions
[36] In response to the applicants’ requests for second level reviews, their files were transferred to a separate CRA office in St. Catharines. The officer tasked with these reviews stated that the IC00-1R were applied and the Guidelines were considered. To maintain independence and impartiality, the officer also stated that this review was kept separate from the first level review.
[37] Separate decisions were issued for each applicant. Each decision consisted of a letter and a report with more detailed explanations of the underlying reasons. All the decisions included: a summary of the sequence of events leading up to the principal applicant’s disclosure and the audit of Stoneridge; a description of the share structures for Stoneridge and its associated companies (GLD Holdings Inc., Burton Custom Homes Inc. and Lighthouse Developments Inc.) with an acknowledgment that all of these companies were mentioned in the initial audit letter; and an observation that the principal applicant owned shares in Stoneridge and one or more of the associated companies.
[38] The following details were included in the individual decisions.
Principal Applicant (Graham Worsfold)
[39] In a letter dated October 22, 2010, the officer denied the principal applicant’s second level review request on his personal T1 tax returns. The officer observed that the effective date of disclosure was October 5, 2005, at which time CRA had already commenced an enforcement action against Stoneridge, a related party. Based on the timeline of events, the officer deemed it reasonable to expect that on being made aware of CRA’s intention to audit Stoneridge, Larry Burton and Brad Huggins would have been in immediate contact with all of the corporation’s directors and/or shareholders. Therefore, the officer concluded that the principal applicant’s disclosure was made with knowledge of an enforcement action against Stoneridge.
[40] In the report dated November 9, 2010, the officer noted that the principal applicant’s communications with DioGuardi in September 2005 had occurred before both the audit notification and the subsequent disclosure. This, coupled with the fact that the principal applicant had not filed any tax returns or reported income to the CRA since coming to Canada, rendered it reasonable that the CRA would have uncovered the income disclosed by the principal applicant. As the disclosure was deemed non-voluntary, the officer did not consider the remaining three conditions outlined in the IC00-1R.
[41] In a letter dated November 10, 2010, the officer also denied the principal applicant’s second level review request on his foreign information returns. Similar reasons were provided as those set out above for his personal T1 tax returns.
Lyn Worsfold
[42] In the decision letter dated November 17, 2010, the officer observed that Lyn Worsfold and the principal applicant are the settlors and trustees of the Worsfold Trust. In addition, the officer noted that the second level review had determined that title to a property being reviewed in the Stoneridge audit had been registered in Lyn Worsfold’s name. Therefore, although the audit had not been commenced against Lyn Worsfold, the officer concluded that it was reasonable to believe that the information disclosed by Lyn Worsfold would have been uncovered during the course of the audit. On this basis, the officer found that the disclosure by applicant Lyn Worsfold was not voluntary and her second level review request was denied.
[43] In the report dated November 12, 2010, the officer again noted that Lyn Worsfold and her husband (the principal applicant) were settlors, trustees and primary beneficiaries of the Worsfold Trust. The officer stated that the timeline of events made it reasonable to expect that the principal applicant would have informed his wife that the audit was underway. The officer also acknowledged that the effective date of the initial disclosure was October 5, 2005, although the request to include Lyn Worsfold’s 2001 T1 personal tax return and T1135 foreign income verification statement for 2001 to 2005 was not made until August 31, 2006. Based on the review of the documentation on file, the officer believed that there was sufficient information to conclude that CRA would have uncovered the information disclosed by the principal applicant’s spouse by way of the Stoneridge audit.
Stoneridge Management
[44] In a letter dated November 10, 2010, the officer concluded that Stoneridge Management’s disclosure was not voluntary because it was prompted by the principal applicant’s disclosure. The officer found that through the Stoneridge audit, it was reasonable to believe that CRA would have uncovered the income disclosed by the principal applicant, including the T4 earnings from Stoneridge Management. It was also reasonable to believe that the unfilled T4 supplementaries and summaries, T2 returns and T1135 foreign income information returns for Stoneridge Management would have been addressed through the audit process. As Stoneridge Management did not meet the voluntary requirement, the officer did not consider the other three factors and Stoneridge Management’s second level review request was denied.
[45] In the report dated November 9, 2010, the officer noted that the principal applicant, the sole shareholder of Stoneridge Management, received a T4 slip from Stoneridge Management in 2004 and in future years. The years 2003 and 2004 were initially slated for review in the Stoneridge audit. The officer acknowledged that the effective date of the initial disclosure by Stoneridge Management was August 2006, when its returns were first filed. However, for the sake of consistency, the VDP officer (for the first level review) accepted October 5, 2005 as the effective date of disclosure. Based on the circumstances, the officer found that through the Stoneridge audit, it was reasonable to believe that the CRA would have uncovered the income being disclosed by the principal applicant, a shareholder of one or more of the associated companies. This discovery would have led to the discovery of Stoneridge Management’s unfiled returns.
Worsfold Trust
[46] In a letter dated November 17, 2010, the officer found that Worsfold Trust’s disclosure was not voluntary and its second level review request was therefore denied.
[47] In the report dated November 10, 2010, the officer acknowledged that the principal applicant and his wife were settlors, trustees and primary beneficiaries of the Worsfold Trust. The officer noted that although the effective date of disclosure was October 5, 2005, a request to include information on the trust in the disclosure was not received until August 30, 2006. Nevertheless, whether the effective date of disclosure was in fact October 5, 2005 or August 30, 2006, the officer found that the auditor had made direct contact with Stoneridge prior to both of these dates.
[48] The officer highlighted that the principal applicant, his wife and the Worsfold Trust had not filed any tax returns since their arrival in Canada in 2001 The officer noted that the principal applicant’s no-name disclosure was filed on the same day as Stoneridge’s accountant received the audit letter for Stoneridge, a related party. Therefore, based on the officer’s review of the documentation on file, the officer believed that there was sufficient information to conclude that CRA would have uncovered the unfiled returns and unreported income of the Worsfold Trust from the Stoneridge audit. As the Worsfold Trust’s application was deemed non-voluntary, the officer did not evaluate the remaining three requirements and the second level review request was denied.
Penalties
[49] Based on the above decisions, late filing penalties were issued to all the applicants as follows:
Principal applicant:
T1 tax returns $175,000
Foreign information returns $ 47,500
Lyn Worsfold: $ 12,500
Stoneridge Management: $ 8,000
Worsfold Trust: $ 14,000
The total late filing penalty for all the applicants was $257,000.
[50] In response to these decisions, the applicants filed five separate notices of application. By order of this Court dated February 11, 2011, these applications were consolidated into the present application.
Issues
[51] The applicants submit the following points at issue:
1. Did the respondent err in law in its interpretation of subsection 220(3.1) of the Income Tax Act and the IC00-1R and Guidelines regarding the voluntary criteria?
2. Were the respondent’s decisions based on reasonable findings of fact rationally supported by the material before it?
3. Did the respondent observe the principles of natural justice and procedural fairness in making the decisions?
4. Did the respondent act in bad faith in the decision making process?
[52] I would rephrase the issues as follows:
1. What is the appropriate standard of review?
2. Did the officer err in the finding that the applicants’ disclosures were prompted by the audit of Stoneridge?
3. Did the officer base the decisions on any findings of fact that were made in a perverse or capricious manner or without regard to the material on the record?
4. Did the officer breach principles of natural justice or procedural fairness?
Applicants’ Written Submissions
Standard of Review
[53] The applicants submit that the appropriate standard of review for decisions involving the exercise of discretion under subsection 220(3.1) of the Income Tax Act is reasonableness. Similarly, a reasonableness standard should be applied to the findings of fact made in these decisions. Questions of procedural fairness are reviewable on a standard of correctness.
Relation of Enforcement Action to the Applicants
[54] The applicants refer to subsection 6(a) of IC00-1R which states in part:
A disclosure may not qualify as a voluntary disclosure under the above policy if it is found to have been made with the knowledge of an audit, investigation, or other enforcement action that has been initiated by the [CRA], or other authorities or administrations with which the [CRA] has information exchange agreements. [emphasis added]
[55] The applicants submit that in L'Heureux v Canada (Attorney General), 2006 FC 1180, [2006] FCJ No 1479, this Court held that the words “audit, investigation, or other enforcement action” in the above provision should not be interpreted as being limited to activities initiated against the individual making the disclosure (at paragraph 24). The applicants submit that in this case there were no enforcement actions initiated against any of the them. Rather, the relevant enforcement action pertained to the audit of Stoneridge, a third party.
[56] The applicants highlight the CRA policy on enforcement actions against third parties, as provided in section 8.3.3 of the Guidelines:
In some cases, it may also be appropriate to determine whether or not there has been enforcement activity on related program lines, partners of the client or corporations related to the client. In all cases, discretion should be applied in determining whether these activities should invalidate a disclosure based on how closely those activities relate to the disclosure.
[57] Turning to the enforcement action questions outlined in section 8.3.5 of the Guidelines, the applicants submit that they provide that not all enforcement actions invalidate a disclosure. Further, it is a reviewable error for the second of the two questions not to be expressly considered in the reasons for a VDP decision (see Poon v Canada, 2009 FC 432, [2009] FCJ No 1713 at paragraph 26). This second question focuses on finding a link between the enforcement action and the information being disclosed; not a link between any particular parties. The applicants submit that support for this position is provided in both L’Heureux above and Amour International Mines d'Or Ltée v Canada (Attorney General), 2010 FC 1070, [2010] FCJ No 1325.
[58] The applicants submit that in the decisions, the officer erred by only focusing on whether they were related to Stoneridge and not whether the information they disclosed was related to the scope of the corporate audit. The applicants highlight the officer’s acknowledgement that although the principal applicant’s returns were not reviewed to determine the source of income, the officer was aware that none of the applicants reported income from Stoneridge. In addition, the officer did not review Stoneridge’s T2 returns to consider whether there was a link between the information on the corporate tax returns and the information disclosed by each of the applicants.
[59] The applicants submit that by limiting the review to the relationships between the entities involved and not examining what was disclosed and audited, the officer blatantly disregarded the enforcement action questions. In so doing, the officer erred in law. The decisions should therefore be quashed and referred back for redetermination.
Findings of Fact
[60] The applicants also submit that the officer’s findings that the disclosures were not voluntary were based on two unreasonable findings of fact that were not rationally supported by the material:
1. The principal applicant had knowledge of the audit of Stoneridge, which triggered the disclosure for all the applicants; and
2. Each applicant was related to Stoneridge and the audit of Stoneridge would have uncovered the information disclosed by each applicant.
[61] On the first finding of fact, the applicants submit that the decisions infer that they all had knowledge of the audit from either Larry Burton or Brad Huggins prior to the October 5, 2005 disclosure; knowledge which prompted their disclosures. However, the applicants submit that suspicion of such prior knowledge cannot alone form the basis of a reasonable decision. The decision must be based on a full objective evaluation of the facts.
[62] The applicants submit that there is independent evidence of another reason that explains the timing of their disclosure. This reason was described by both the principal applicant and Paul DioGuardi in their provision of details on the events preceding the filing of the principal applicant’s formal disclosure. Records (receipts, emails and phone logs) were filed to substantiate these claims. This evidence must be considered when weighing whether the disclosures were made as a result of knowledge of a pending audit. In addition, in preferring one version of events over the other, the officer erred in not providing an explanation for the preference chosen.
[63] The applicants also submit that the officer’s testimony on cross-examination indicates that the officer ignored the correspondence and actions prior to the date that the auditor first attempted to contact Larry Burton. However, this information was relevant as it supported the alternative explanation of the timing of the applicants’ disclosure. Had it been considered, any suspicions that the principal applicant only came forward in response to knowledge of the audit would have been eliminated. The applicants submit that this refusal to consider relevant evidence is a breach of procedural fairness and also renders the decisions unreasonable.
[64] The applicants highlight the officer’s failure to contact any of the parties to evaluate the credibility of their statements. Rather, the officer made the decisions purely on the basis of a paper exercise and little deference is therefore owed. By failing to articulate a rationale for the officer’s suspicions and by failing to ask further questions of the parties, the decisions are unsupported and the applicants are deprived of the right to know or respond to the allegations.
[65] Further, the applicants submit that the officer’s conclusion that the principal applicant actively ran Stoneridge was based on a misapprehension of the facts and was not supported by the evidence. In support, the applicants note Larry Burton’s: signature on the Stoneridge tax returns; repeated involvement in the audits; and position as the listed contact for Stoneridge. In addition, the applicants highlight the principal applicant’s: constant absence from Canada due to overseas travel for business; external employment and significant income from his computer development business; lack of income from Stoneridge; statement to the auditor that Larry Burton and David Turk were responsible for day to day operations as he was too busy with his other companies; and statement to the auditor that the only time the principal applicant got involved pertained to a loss of right-of-way that affected two of the properties purchased by Stoneridge.
[66] Similarly, the officer’s finding that an authorized contact of a company would immediately inform all directors and shareholders of an audit was purely speculative without any evidentiary basis.
[67] The applicants also highlight the officer’s limited analysis in the decisions as to how the applicants (other than the principal applicant) would have been made aware of the Stoneridge audit.
[68] For these reasons, the applicants submit that they were not properly accorded the benefit of doubt required in evaluations of the voluntariness of disclosures under section 8.3.5 of the Guidelines. The officer did not establish a reasonable basis in the evidence that supported a causal link between the notification of a third party of the planned audit and the applicants’ disclosures. The applicants submit that this rendered the officer’s decisions unreasonable.
[69] On the second finding of fact, the applicants submit that the officer erred in the shareholding analysis to determine whether the applicants were related to Stoneridge as defined under section 251 of the Income Tax Act. Nevertheless, none of the applicants could be considered related to Stoneridge as the principal applicant only had a non-controlling one third indirect interest in the company and none of the other applicants owned any shares in it. In addition, submissions were provided throughout the second review that outlined the lack of relationship between the applicants and Stoneridge. It did not appear that the officer considered these submissions.
[70] The applicants further submit that the decision for the principal applicant did not include a statement that the officer believed the audit of Stoneridge would have uncovered the income that the principal applicant disclosed. As such, the officer did not address the second of the two enforcement action questions. As per Poon above, the decision should therefore be overturned.
[71] The applicants also criticize the officer’s speculative domino effects approach to the Stoneridge audit. According to the officer’s affidavit, the Stoneridge audit would have uncovered the fact that the applicants had not filed tax returns. However, the applicants submit that this approach disregards the CRA policies that expressly focus on the relationship between the information being audited and that being disclosed. In addition, the applicants submit that the officer’s belief that more information would be uncovered was purely speculative and not supported by the evidence. In fact, the narrow scope of the Stoneridge audit would not have uncovered the actual information disclosed by the applicants in their voluntary disclosures.
[72] Finally, the applicants submit that the statement in the October 5, 2005 letter that “as the audit progresses, we may request additional records related to the associated companies and all respective shareholders” is a standard sentence used in audit notifications. Drawing similarities to the facts in Amour Mines above, the applicants submit that the mere possibility that an auditor could have asked for additional records was insufficient to demonstrate that the enforcement action would have triggered an in-depth audit and uncovered the information filed by them. There was also nothing in the screener’s comments, auditor’s notes or audit plan to suggest that CRA intended to pursue or did pursue any audit of the applicants.
Principles of Natural Justice and Procedural Fairness
[73] The applicants submit that the officer did not observe the principles of natural justice and procedural fairness in making the decisions. The applicants submit that when exercising its discretion, the CRA is both required and expected to operate reasonably and by its own guidelines (see Montréal (City) v Montreal Port Authority, 2010 SCC 14, [2010] 1 SCR 427 at paragraph 33).
[74] As discussed above, the applicants submit that there were several procedural errors in the officer’s decision, specifically:
1. Failure to follow the criteria set out in the Guidelines;
2. Failure to give the applicants the benefit of doubt;
3. Failure to provide adequate reasons;
4. Reliance on conjecture and speculation to support the findings of fact;
5. Considerations of irrelevant evidence of the relationship between parties; and
6. Ignoring relevant submissions and evidence.
[75] The applicants criticize the officer’s failure to obtain the full audit and investigation file for the second level reviews. Rather, the officer relied on incomplete evidence and the opinion and summaries of others, which perpetuated the prejudices and errors identified at the first level reviews.
[76] The applicants further submit that the length of time that it took to process the second reviews, over two and a half years, was unacceptable and invalidated the subsequent decision.
[77] As such, the decisions were not made in accordance with the principles of natural justice and they lacked procedural fairness.
[78] In summary, the applicants submit that the decisions were not made in accordance with the Guidelines and inadequate and unsupportable reasons were provided. These were based on conjecture and cannot withstand probing examination. The decisions should therefore be set aside and the applicants’ VDP requests reconsidered.
Respondent’s Written Submiss