Tax Tip[] Fairness Provisions

Fairness Provisions

“If CRA does not consider all facts, the courts are willing to reverse their decisions.”

In the case of Singh vs. The Queen(T-293-05), the Court had to decide whether the CRA had applied the Fairness Provisions appropriately with respect to the waiver of penalties and interest.

The taxpayer had received a loan of $70,000 from an arm’s length Canadian company during the years 1994 to 1996, to be used for the taxpayer’s education at a university in the United States. The loan was to be forgiven equally over a four-year period. The amount forgiven would be added to the taxpayer’s income while the taxpayer worked for the corporation. The taxpayer never worked for the corporation because of outside circumstances. The corporation wrote off the loan as a bad debt in 1997. A CRA auditor determined that, because the loan was written off in 1997, it should have been included in the taxpayer’s income in that year.

The taxpayer did not know that the loan had been written off, since he was not living in Canada at that time. He found out when he received a letter from the CRA advising him that he had to include the $70,000 loan write-off in his 1997 income.

The Court was concerned about several points. Even though the Court was not asked to determine whether the loan write-off had been appropriately included in the taxpayer’s income, this was of concern to the Court, noting that a loan write-off would only be considered income when the loan is “non arm’s length, low interest or forgiven,” and none of these characteristics applied. The Court observed that the debt should not have been included in the taxpayer’s income. Even though the Court did not have jurisdiction to make this determination, the CRA had the ability, pursuant to subsection 152(4.2), to make an appropriate adjustment. The Court suggested that the taxpayer make an application under that subsection that the CRA make an adjustment.

The Court clarified that the loan was never forgiven. Even though it was written off, the corporation was still actively pursuing the debtor, and the CRA auditor was well aware of this. The Court was concerned about the year in which the income was allocated to the taxpayer. In its analysis of which year the loan was to be included in the taxpayer’s income, the Court indicated that the CRA’s choice of year was incomprehensible, and asked: “How can one arbitrarily attribute the amount to the taxation year 1997 or tax it as forgiven until such time as the facts indicate that such was the case?” The Court made several references to the fact that the auditor had provided an incorrect report to the Fairness Officer.

The Court determined that “the forgiveness officer clearly ignored relevant facts or took into consideration irrelevant facts and the decision is contrary to law.” The penalties and interest were waived. This is another example of the CRA making observations and arriving at conclusions regardless of the facts. When a fairness decision is patently wrong, it appears that the Court is more and more willing to look at the facts to ensure a correct decision.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Application of Fairness Provision in Court

“The fairness guidelines issued by CRA do not apply to the Courts..”

A recent case dealt with how the CRA applies the fairness provision found in subsections 220(2.1), 220(3) and 220(3.1) of the Income Tax Act [Dorothea Knitting Mills Limited (2005 FC318)]. In this case, the taxpayer had filed the appropriate Scientific Research & Economic Development (“SR&ED”) forms with the CRA. Unfortunately, they filed the supporting technical information after the specified period within which it was supposed to have been filed. The CRA disallowed the SR&ED claim because of the failure to file all of the information by the due date, in accordance with the Income Tax Act.

Under the provisions of subsection 220(2.1), the taxpayer requested ministerial discretion to allow late filing of certain information. A Minister’s delegate advised the taxpayer that they would not exercise their discretion to reinstate the claim. The CRA advised that the Income Tax Act allows the Minister to exercise ministerial discretion only where there are extenuating circumstances for late filing, the claimant took reasonable steps to comply with the law, or the claimant acted on incorrect written information provided by the agency.

The Court stated that “It is not clear where these criteria come from,” and that these criteria are “not found anywhere in the legislation.” CRA administrative policy has developed these three criteria. The Court stated emphatically that these criteria are not relevant in determining whether or not the Minister should waive the late filing of documents. The key issue was not whether the Minister should have allowed the late filing of the SR&ED submission. Rather, it appeared that the Minister did not even consider whether the forms should be allowed to be filed, because the taxpayer did not meet the three tests that had been developed internally by the CRA.

The Court noted that “the Minister’s delegate appears to have imposed these criteria on himself, and elevated them to the status of decisive factors.” The Court quoted Justice Joyal in the Kutlu decision that “There is no authority for this in the ITA, and the cases are opposed to exercising a discretionary authority in that way.” In this case, the Court said that it was open to the Minister’s delegate to consider the argument put forward by the taxpayer and to accept it or reject it, as he deemed appropriate. “It was not, however, open to the Minister’s delegate to refuse the request simply because it did not meet criteria that have no foundation in the enabling legislation.”

The Court allowed the taxpayer’s application for judicial review of the Minister’s decision. This meant that a different Minister’s delegate has to review the information again before making a decision.

The important lesson in this case is that the CRA’s internal policies are not law. Obviously, individuals employed by the CRA will adhere to their own administrative policy. However, this does not mean that a court has to follow those policies. The Court will not accept the concept of the CRA’s administrative policies being applied to a Fairness Request when such policies have no basis in law.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.